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


               EXAMINING FEDERAL RESERVE REFORM PROPOSALS

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

                                HEARING

                               BEFORE THE

                        SUBCOMMITTEE ON MONETARY

                            POLICY AND TRADE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 7, 2017

                               __________

       Printed for the use of the Committee on Financial Services
       
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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:
    November 7, 2017.............................................     1
Appendix:
    November 7, 2017.............................................    41

                               WITNESSES
                       Tuesday, November 7, 2017

Bernstein, Jared, Senior Fellow, Center on Budget and Policy 
  Priorities.....................................................     8
Levin, Andrew T., Professor of Economics, Dartmouth College......     7
Levy, Mickey, Managing Director and Chief Economist, Berenberg 
  Capital Markets................................................    10
Plosser, Charles I., Visiting Fellow, Hoover Institution.........     5

                                APPENDIX

Prepared statements:
    Bernstein, Jared.............................................    42
    Levin, Andrew T..............................................    53
    Levy, Mickey.................................................   112
    Plosser, Charles I...........................................   120

 
               EXAMINING FEDERAL RESERVE REFORM PROPOSALS

                              ----------                              


                       Tuesday, November 7, 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 2:19 p.m., in 
room 2128, Rayburn House Office Building, Hon. Andy Barr 
[chairman of the subcommittee] presiding.
    Present: Representatives Barr, Williams, Huizenga, 
Pittenger, Love, Hill, Emmer, Mooney, Davidson, Tenney, 
Hollingsworth, Moore, Foster, Sherman, Green, Kildee, Vargas, 
and Crist.
    Chairman Barr. The chair is authorized to declare a recess 
of the committee at any time, and all members will have 5 
legislative days within which to submit extraneous materials to 
the Chair for inclusion in the record.
    This hearing is entitled ``Examining Federal Reserve Reform 
Proposals.'' I now recognize myself for 5 minutes to give an 
opening statement.
    Some see the last decade of monetary policy as a failure, 
while others see it as a success. Wherever we stand on this 
debate, I hope we can all agree that stronger economic growth 
over recent quarters is promising and American economic 
opportunities can expand even faster with reforms that build on 
the best ideas from both sides of our aisle.
    The legislation we will consider today does just that. 
Monetary policy can appear complicated, but whether you work in 
the Fed's Eccles Building or in any of our districts, monetary 
policy supports a stronger economy when it is communicated 
simply and clearly. Recent Fed research finds that uncertainty 
about monetary policy slows our economy and reduces credit 
availability. In other words, simple and clear policy 
communications improve American economic opportunities.
    Both Democratic and Republican witnesses have testified 
before us on the importance of a simple and clear communication 
of monetary policy. For example, during our last Humphrey-
Hawkins hearing, Federal Reserve Board Chair Yellen expressed 
interest in working with our committee to codify a simple and 
effective strategy for a more transparent monetary policy.
    In addition, former Vice Chair of the Federal Reserve Board 
Dr. Donald Kohn offered the following advice in a recent 
Brookings Institution report. The Federal Reserve should use 
the semi-annual monetary policy report to better explain and 
focus on its broad strategy. For some time, the Fed's Open 
Market Committee has been shown the results of a number of 
policy rules, and this material has been accompanied by 
explanations of why the current and expected settings of 
monetary policy might deviate from the rules.
    The Monetary Policy Transparency and Accountability Act 
that we will consider today provides for exactly this type of 
framework. Indeed, this bill reflects the very generous advice 
of both Chair Yellen and Dr. Kohn. Our draft legislation also 
addresses what Members of Congress and experts from both sides 
of the aisle see as an opportunity to better manage our fiscal 
house and increase our financial resiliency by protecting 
households from bailouts and holding Congress to account for 
tough decisions that can easily be punted to the Fed. Our 
congressional Accountability for Emergency Lending Act takes an 
important step in this direction by embracing this bipartisan 
Warren-Vitter framework for congressional approval of emergency 
lending.
    At the same time, our Independence from Credit Policy Act 
maintains the Fed's role as an originator of emergency loans 
while insulting our monetary authority from compromising 
political pressures to overreach into credit policy. 
Authoritative economists of different stripes share a common 
concern about these pressures. Testifying as a witness for my 
Democratic friends, MIT Professor Simon Johnson emphasized this 
bipartisan agreement.
    I think we are all agreeing that this fiscal policy 
infrastructure is the responsibility of the fiscal authority, 
which is that of the Congress and the United States acting 
through the Executive Branch. It is not the responsibility and 
should not become the responsibility of the Federal Reserve.
    Recently, Brandeis Professor Stephen Cecchetti shared the 
same concern as a minority witness for our Joint FI-MPT 
Subcommittee hearing. And even the New York Times' Paul Krugman 
joined this chorus, highlighting how the Fed's unconventional 
balance sheet blurs the lines between monetary and fiscal 
policies.
    Acknowledging such concerns during our last Humphrey-
Hawkins hearing, Federal Reserve Board Chair Janet Yellen 
committed the FOMC (Federal Open Market Committee) to re-
establishing a bright line between monetary and credit policy. 
She said the FOMC has clearly indicated that it intends to 
return over time to a primarily Treasury-only portfolio. And 
that is in order not to influence the allocation of credit in 
the economy.
    Coupled with our congressional Accountability for Emergency 
Lending Act, the Independence from Credit Policy Act does 
precisely what Chair Yellen has advocated--a return to a 
primarily Treasury-only portfolio while maintaining the Fed's 
role as an originator of emergency loans.
    Greater transparency, independence, and accountability for 
monetary policy coupled with greater fiscal accountability for 
Congress, that is a solid bipartisan recipe for what we all 
want, and that is greater economic opportunity for all 
Americans. I look forward to our witnesses' testimony and 
working with my friends on both sides of the aisle to realize 
the considerable benefits that this legislative package will 
deliver to each of our diverse constituents.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentlelady from Wisconsin, Gwen Moore, for 3 
minutes for an opening statement.
    Ms. Moore. Thank you so much, Mr. Chairman. And I want to 
thank our witnesses for coming in today. I look forward to your 
testimony.
    As for the bills we are considering, on one hand, I think 
that they are better than the other Audit the Fed bills we have 
seen, but overall they seem like problems foisted into a 
functioning system. I am glad that the majority has abandoned 
the so-called Taylor rule, but a watered-down Taylor rule is 
probably as unworkable if the Taylor rule is flawed.
    The 13(3) authority, I have my own questions about it, but 
I have spent some time with the Fed understanding the 
importance of 13(3). Dodd-Frank made the right amount of 
reforms to the Fed in this regard, and I sure hope that the new 
Fed chair would really sit down with Chair Yellen and really 
let her explain the benefits that 13(3) has had.
    At this point, I think the one thing that frightens me the 
most--and I would appreciate more clarity from this panel on--
is the restriction of what the Fed holds, this Treasury-only 
schemata. It seems to me that this would be very problematic--
this would have been problematic had it been in place during 
our crisis. So like I said, I don't see the problem that these 
bills are designed to solve, but I can see plenty of problems 
this legislation might cause.
    I would like to yield the rest of my time to Mr. Sherman.
    Mr. Sherman. The Fed should be restructured in part because 
it is so highly undemocratic. It is the only governmental 
institution where at least some of the leaders are selected by 
the notion one bank, one vote. All Fed Governors at all levels 
should be Presidential appointees.
    Second, it is undemocratic because the California bank does 
not have a permanent seat on the Fed committee, whereas the New 
York bank does, whereas far more people live in the California 
region. The allocation of seats should reflect population, not 
political power.
    If there has been a failure of Fed policy, it is because 
they were too timid with quantitative easing. And now they are 
too hawkish when it comes to raising the interest rate. Our 
inflation rate is not only below their target, it is below the 
target they should have, which would be closer to 2.5 percent.
    We continue to have low wages. What Americans demand is the 
kind of labor shortage that will cause much faster growing 
wages. That cannot be achieved with the Fed's current timid 
policy of caving in to those who just, for historical reasons, 
believe we should have higher interest rates and abolish 
quantitative easing.
    Finally, it is only because Fed policy is the domain of 
people who live in the Fed world that we ignore the $75 billion 
to $100 billion the Fed has been able to transfer to the U.S. 
Treasury. In my district, that is real money, and yet it 
doesn't get the--we pay far more attention on the cost of 
building one bridge in Alaska than we have in $75 billion to 
$100 billion transferred to the U.S. Treasury for several years 
in a row because nobody pays attention to the Fed except the 
Fed community, and the Fed community is embarrassed by its 
profit.
    I yield back.
    Chairman Barr. The gentlelady's time has expired. Would the 
gentlelady yield back?
    Ms. Moore. I yield back.
    Chairman Barr. Gentlelady yields back. At this time, we 
would like to welcome the testimony of our witnesses. First, 
Dr. Mickey Levy, the Chief Economist for the Americas and Asia 
at Berenberg Capital Markets. He conducts research on a variety 
of U.S. and global economic and macroeconomic topics and is an 
adviser to several Federal Reserve banks, including the Federal 
Reserve Bank of New York. Prior to his current position, Dr. 
Levy was Chief Economist at Bank of America and Blenheim 
Capital Management. He also has been analyst at both the 
Congressional Budget Office and the American Enterprise 
Institute. Since 1983, he has served as a member of the Shadow 
Open Market Committee.
    Dr. Andrew Levin, a Professor of economics at Dartmouth 
College. He was an economist at the Federal Reserve Board for 2 
decades, including 2 years as a special adviser to Chairman 
Bernanke and then Vice Chair Yellen on monetary policy strategy 
and communications. He subsequently served as an adviser at the 
International Monetary Fund. Professor Levin is currently an 
external adviser to the Bank of Korea and a regular scholar at 
the Bank of Canada. He has also served as a consultant to the 
European Central Bank and as a visiting scholar at the Bank of 
Japan and the Dutch National Bank. And he has provided 
technical assistance to the National Banks of Albania, 
Argentina, Ghana, Macedonia, and Ukraine. He received his PhD 
in economics from Stanford University in 1989.
    Jared Bernstein is the Senior Fellow at the Center on 
Budget and Policy Priorities. From 2009 to 2011, Bernstein was 
the Chief Economist and Economic Adviser to Vice President Joe 
Biden; Executive Director of the White House Task Force on the 
Middle Class; and a member of President Obama's economic team. 
Bernstein's areas of expertise include Federal and State 
economic and fiscal policies, income inequality and mobility, 
trends in employment and earnings, international comparisons, 
and the analysis of financial and housing markets.
    Prior to joining the Obama Administration, Bernstein was a 
Senior Economist and the Director of the Living Standards 
Program at the Economic Policy Institute in Washington, D.C. 
Between 1995 and 1996, he held the post of Deputy Chief 
Economist at the U.S. Department of Labor. Bernstein holds a 
PhD in social welfare from Columbia University.
    Finally, Dr. Charles Plosser is a Visiting Fellow at the 
Hoover Institution at Stanford University. Plosser served as 
the President and CEO of the Federal Reserve Bank of 
Philadelphia from 2006 until his retirement in 2015. In his 
position, he served as a member of the Federal Open Market 
Committee. Prior to joining the Federal Reserve, Plosser was 
the John M. Olin Distinguished Professor of Economics and 
Public Policy and Director of the Bradley Policy Research 
Center at the University of Rochester's William E. Simon 
Graduate School of Business Administration, where he served as 
Dean from 1999 to 2003.
    In 2004, he was a visiting scholar at the Bank of England. 
Since January 2016, Plosser has served as a Public Governor for 
FINRA, where he serves on the Investment Committee and the 
Financial Operations and Technology Committee. Plosser earned 
his PhD and MBA degrees from the University of Chicago.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. Without objection, each of 
your written statements will be made part of the record. Dr. 
Plosser, we will start with you. You are now recognized for 5 
minutes. And if you could just push the button to turn on your 
microphone.

                  STATEMENT OF CHARLES PLOSSER

    Dr. Plosser. I am technologically challenged at times.
    Chairman Barr. Thank you, sir.
    Dr. Plosser. Chair Barr, members of the committee, thank 
you very much for the opportunity to share some thoughts with 
you today on the Federal Reserve. I have been talking about the 
Federal Reserve for the last 20 years at various times, and so 
I have given a lot of thought to many of its issues.
    It is simplified but helpful to think of Fed actions in 
terms of its balance sheet, liabilities, predominantly 
currency, and the reserves of the balance sheet. Increasing the 
liabilities is typically associated with monetary policy. 
However, the Fed can also manage the asset side of its balance 
sheet. Changes in composition of those assets are typically 
referenced to as credit policy.
    Historically, the Fed has conducted monetary policy through 
the purchase or sale of Treasury securities. Indeed, the vast 
bulk of the Federal Reserve assets have been U.S. Treasuries 
since the modern Fed began in the 1950's. Credit policy simply 
did not play a role.
    Moreover, for most of the post-World War II era, the Fed's 
portfolio of Treasuries was purposefully designed to be neutral 
vis-a-vis the private sector. It only held Treasuries, and the 
distribution among bills, notes, and bonds was managed to 
roughly match the distribution of the Treasury's issuances. In 
other words, it was felt that the Fed's portfolio should not 
try to alter the relative prices determined in the marketplace.
    Now, during the financial crisis and subsequent recession, 
the Fed altered both the size and composition of its balance 
sheet. In early 2008, the Fed sold Treasuries to fund the 
purchase of approximately $30 billion of mostly private-sector 
high-risk assets to support the acquisition of Bear Stearns by 
JPMorgan. Credit was also extended through various other 
lending programs that targeted specific industries, asset 
classes, and creditors.
    Now, whether you can consider these as justified because of 
the credit or not, they were, in effect, debt-financed fiscal 
policy without explicit authorization of Congress. Now, given 
the distributional effects of such interventions, it is not 
surprising they became somewhat controversial.
    The major form of--another major form of credit policy was 
the result of quantitative easing. QE was unconventional, but 
it was also unprecedented in that a significant portion of the 
assets purchased were in the form of mortgage-backed 
securities, not U.S. Treasuries. This action was explicitly 
intended to provide credit support for the housing sector.
    So why should the Fed have the authority to allocate credit 
within the economy in support of one industry, one company, or 
one individual? What are the risks and dangers of such a 
framework? The major risk is that it invites political 
interference and undermines the integrity of fiscal policy. 
History suggests that central banks that remain independent of 
the political environment and the fiscal authorities do better 
at controlling both inflation and promoting economic stability. 
Do we really want the Fed being lobbied by Congress or the 
public to manage the assets on its balance sheet to promote 
various political or fiscal agendas?
    The current trends I believe are not encouraging. For 
example, some Members of Congress approached the Fed to lend 
money to the automobile companies in 2008. In 2010, Congress 
required the Fed to fund a Federal agency over which it had no 
authority. And in 2015, Congress funded part of a 
transportation bill off the Fed's balance sheet.
    I believe these actions are bad policy. They undermine the 
independence of our central bank monetary policymaking by 
confusing the roles and responsibilities of monetary and fiscal 
policy. Fed independence is fragile, and it is eroding. The Fed 
itself is contributing to this erosion of independence by 
engaging in off-budget fiscal policy through credit 
allocations.
    A policy that restricts the Fed to own only Treasuries 
would go a long way toward limiting the Fed's ability to engage 
in credit allocation and limit the potential for abuse or 
political abuse in particular of its balance sheet. It would 
also help maintain a clear distinction between the role of the 
Fed and the role of the fiscal authorities, and thus help 
protect it from political interference.
    Some say an all-Treasury portfolio was dangerous and would 
limit the Fed's ability to respond in a fiscal crisis. But 
since 2009, I have been arguing that there is a better way. And 
it is to recognize and clarify who has the decision rights when 
it comes to fiscal decisions and who should be held 
accountable. The idea is to make clear that such emergencies 
is--it is the fiscal authorities that have the power and the 
authority to conduct fiscal actions, who should own both the 
decision rights and the accountability.
    The role of the Fed should be limited to helping the 
government execute those policies, but the Treasury would then 
be responsible for obtaining approval of Congress for the 
interventions and then required to swap Treasuries for non-
Treasury securities acquired by the Fed, thus restoring the 
all-Treasury character of the Fed's balance sheet.
    This Fed Treasury accord would enable emergencies to be 
addressed in a timely manner while protecting the integrity, 
accountability of fiscal policy decisionmaking.
    [The prepared statement of Dr. Plosser can be found on page 
120 of the Appendix.]
    Chairman Barr. The gentleman's time is expired. And we look 
forward to continuing this discussion in the Q&A. So we will 
now have to move on to Dr. Levin. You are recognized for 5 
minutes for your opening statement.


                    STATEMENT OF ANDREW LEVIN

    Dr. Levin. Chairman Barr, Ranking Member Moore, and members 
of the Subcommittee on Monetary Policy and Trade, thank you for 
inviting me to testify at this hearing.
    The Federal Reserve is America's central bank. Its monetary 
policy decisions affect every American. Given the Fed's crucial 
role, it is important to ask, to whom is the Federal Reserve 
accountable? Who is the Fed's boss?
    Of course, the answer is Congress. The Fed reports directly 
to Congress, not to the President or anyone else. Now, I have 
intentionally used the term ``boss'' because we can draw on 
basic management principles to shed light on the issues being 
considered here today.
    Turning to exhibit one, here are three principles that are 
followed by every well-run business or nonprofit organization. 
One, the boss must stay well informed about the employee 
strategy. Those consultations take place in annual reviews and 
occasional status updates, which are essential for maintaining 
accountability and avoiding micromanagement. After all, an 
employee can't be productive if the boss is constantly second-
guessing their decisions. And that is the basic rationale for 
preserving the Fed's operational independence, but requiring 
the Fed to explain its policy strategy in terms of simple 
benchmarks, which I will return to in a moment.
    Two, extraordinary budget items require prompt approval. An 
employee should have authority to incur routine expenses, but 
the boss has to approve extraordinary items. And that principle 
is the essential rationale for preserving the Fed's operational 
independence, again, but establishing procedures to facilitate 
prompt congressional approval for its emergency lending 
facilities.
    Three, extraneous tasks should be re-assigned elsewhere. 
Effective delegation requires a clear delineation of 
responsibilities. If a work assignment evolves into a task that 
doesn't fit within the employee's job description, then the 
boss should re-assign that task to someone else.
    Following the same logic, private assets shouldn't stay 
indefinitely on the Fed's balance sheet. Those assets should be 
swapped for U.S. Treasury securities, again, preserving the 
Fed's operational independence and its designated scope of 
responsibility.
    Now I would like to focus on the rationale for establishing 
simple policy benchmarks. Turning to exhibit two, you can see 
that as of last June, investors saw roughly 50/50 odds, just 
like a coin flip, that the Fed would hike interest rates in 
December. Those odds edged down during the summer, but then 
skyrocketed into early autumn, not because of some sterling new 
economic data, but simply because Fed officials started 
signaling a rate hike through their speeches and interviews.
    In fact, as you see in the exhibit, investors now see the 
rate hike in December as a practical certainty, even though the 
FOMC won't be meeting until mid-December, almost 6 weeks from 
now. Evidently, the strategy underlying the Fed's decisions is 
not very well understood, even by investors who sift through 
every tidbit of Fed communications, and much less so by members 
of the general public.
    By contrast, simple benchmarks can provide a transparent 
means for the Fed to communicate its strategy. It is really 
important to note here such benchmarks are not intrinsically 
hawkish or dovish. For example, Janet Yellen, when she was Vice 
Chair in 2012, referred to one such benchmark as the balanced 
approach rule because of its effectiveness in fostering the 
Fed's dual mandate of maximum employment and price stability.
    Turning now to exhibit three, you can see here that a 
balanced approach benchmark provides a remarkably good 
approximation to the Fed's actual policy path over the last few 
years. In fact, this benchmark is essentially the same as one I 
presented at a conference on full employment that my colleague, 
Jared Bernstein, organized back in 2015. This exhibit shows, it 
confirms that simple benchmarks can be helpful in clarifying 
the Fed's monetary policy strategy. That will contribute to its 
overall transparency and accountability to the Congress, its 
boss, and to its effectiveness in serving the American public.
    Thank you for your consideration. I will be glad to answer 
any questions.
    [The prepared statement of Dr. Levin can be found on page 
53 of the Appendix.]
    Chairman Barr. Thank you, Dr. Levin. And, Dr. Bernstein, 
you are now recognized for 5 minutes.


                  STATEMENT OF JARED BERNSTEIN

    Dr. Bernstein. Well, thank you very much. Great to be here. 
And my testimony conveys a simple message. The independence of 
the central bank is an essential ingredient to its functioning. 
Of course, that independence exists within the legal context 
set forth by Congress and it is essential for this committee to 
continuously revisit this context.
    But maintaining the central bank's independence must always 
be an elevated consideration. In this context, some of the 
ideas and the proposals under discussions are worthy of 
consideration, but some are too restrictive. They threaten the 
Fed's independence and add unnecessary and potentially damaging 
process requirements that could do more harm than good to the 
U.S. and even the global economy.
    Before commenting on the proposals, I would like to suggest 
that in an all-too-other dysfunctional and highly partisan 
environment, the Federal Reserve is one institution that has 
been highly effective in carrying out its mission. Though the 
Fed failed to identify the housing bubble, it quickly moved 
into emergency mode when the bubble burst and the downturn 
ensued.
    The bank deployed its significant weaponry against the 
downturn, including its first line of defense, reductions of 
the policy rate and emergency lending, and later when the 
policy rate got stuck at its lower bound of zero, the Fed 
turned to alternative forms of monetary stimulus.
    While some of these actions are behind the motivations for 
today's hearing, my assessment is that they were effective in 
offsetting the historically large demand contraction that 
followed the crisis. I cite research that tries to isolate the 
impact of quantitative easing, including bond purchases that 
would not be permissible, agency MBS (mortgage-backed 
security), under one of the proposals considered today. These 
actions were effective in thawing credit markets in hard-hit 
sectors of the market, noticeably housing finance.
    Post-recession, the Fed continued to promote the recovery 
and the unemployment rate recently fell to what is now the 
lowest jobless rate in 17 years. In other words, if I were 
looking around Washington for an institution that fits the 
adage ``if it ain't broke, don't fix it,'' my first thought 
would be the Federal Reserve.
    Among the three proposals under review today, I find the 
proposal to limit the Fed's independence regarding its 
emergency lender of last resort function potentially most 
problematic. Though I recognize the motivation for the 
proposal, I see two major drawbacks.
    First, since the crisis, Congress legislated the Dodd-Frank 
financial reforms, key sections of which were designed 
specifically to reduce the need for Fed intervention in this 
space, including a vice chair position for the Fed, for 
financial supervision, numerous restrictions to 13(3) lending 
authorization, and liquidation authority.
    Dodd-Frank, along with recent international accords under 
Basel III, also increased the first line of defense against 
illiquidity and solvency crises, capital requirements that 
disallow excessive leverage. I see no reason to add new 
complexities into this system until we give the Dodd-Frank 
measures a chance.
    Second, and this is a profound concern with this proposal, 
it takes the authority for emergency lending outside of the Fed 
and requires both chambers of Congress to provide a timely 30-
day approval of the Fed's emergency loans. I believe this adds 
unnecessary risk to credit markets and the broader economy. It 
is an imprudent departure from the lending authority 
established in 13(3) of the Fed's charter, one that undermines 
both the independence of the institution and its role of, 
quote, lender of last resort. With this change, the 535 Members 
of Congress all become lenders of last resort, a possibility I 
strongly urge this committee to avoid.
    If Congress fails to approve an emergency lending program 
within 30 days, the borrower, who by definition is facing a 
balance sheet crisis, must pay the loan back to the Fed. 
Moreover, Members of Congress and their staffs must quickly 
engage in highly technical analysis of whether lending 
institutions are illiquid or insolvent, the quality of their 
collateral. Such analysis is standard practice at the Fed, but 
by insisting Congress engage in it as well, the proposal 
introduces the possibility of politicizing the analysis--and if 
Congress fails to act in a timely manner--triggering 
significant market disruptions.
    I do think the bar should be high for approval of emergency 
lending, but my bottom line is that clearing that bar should be 
the purview of the Fed, not Congress. Thus, should the 
committee consider raising the internal bar within the Fed, 
inside the Fed, while this should be done carefully and with 
great attention to potential unintended consequences, it is 
consistent with prudent congressional regulation.
    Conversely, raising the external bar by requiring 
congressional approval goes way beyond this benchmark. The best 
way to avoid emergency lending by the Fed is to avoid credit 
bubbles, systematically underpriced risk, and the crises that 
followed these financial pathologies. And the way to achieve 
that is through market oversight and regulation.
    I would also caution the committee against further 
restrictions on the Fed as to the type of debt they can 
purchase in their open market regulations. The Banks of 
England, Japan, Canada, and Europe all have few restrictions on 
the type of assets they can purchase, and this creates a 
flexibility for their central banks to bring the water to the 
specific sources of the fire.
    I thank you, and I look forward to your questions.
    [The prepared statement of Dr. Bernstein can be found on 
page 42 of the Appendix.]
    Chairman Barr. Thank you, Dr. Bernstein. And, Dr. Levy, you 
are now recognized for 5 minutes for an opening statement.


                    STATEMENT OF MICKEY LEVY

    Dr. Levy. Chairman Barr, Ranking Member Moore, and members 
of the committee, I sincerely appreciate this opportunity.
    The ultimate objective is healthy, sustained economic 
growth and rising standards of living. The challenge is 
identifying the proper policies and the proper mix of 
policies--fiscal and tax, regulatory and monetary--to achieve 
desired outcomes. The Fed's emergency measures during the 2008-
2009 crisis certainly helped stabilize financial markets and 
avert an even deeper recession. But we have to distinguish 
between the conduct of policy during a crisis and during normal 
times.
    The efficacy of the Fed's sustained artificially low 
interest rates and massive asset purchases once the recovery 
took hold are questionable and have been the source of 
undesired distortions and pose very large risks. The Fed's QE3 
asset purchases policy to reinvest all the maturing assets, 
artificially low interest rates, all of these stimulated 
financial markets. But they failed to stimulate faster growth. 
Nominal GDP growth has actually decelerated.
    The economy would have grown along its modest pace and job 
gains would have occurred even if the Fed had not engaged in 
QE3 and even if it had normalized rates quicker. History shows 
conclusively that once an economic recovery takes hold, raising 
rates back to neutral does not harm the economy.
    But the Fed's extension of monetary policy through uneven 
discretionary approaches has given a false sense or a false 
impression that the mandate of the Fed is to manage the real 
economy and fine-tune it, and that more and more monetary 
stimulus was needed to prop up the economy. In reality, the 
frustrating underperformance of the economy reflected the 
growing web of regulatory policies, government-mandated 
expenses, and tax burdens.
    The Fed's extended easy policies has created many 
distortions and burdens. Let me mention a few. Tens of millions 
of primarily older people face low yields on their savings. 
Tens of millions of renters face higher rental costs as real 
estate prices have moved up, stimulated by the Fed. Moreover, 
the Fed's $4.5 trillion portfolio involves enormous risks. The 
CBO estimates that a 1 percentage point increase in interest 
rates would increase budget deficits by $1.6 trillion over 10 
years. Take this risk seriously.
    My recommendations are, the Fed must continue to normalize 
interest rates as it has been. With regard to inflation, the 
factors that have brought down inflation recently below the 
Fed's 2 percent target are good for the economy and increased 
purchasing power. The Fed should not express so much public 
angst about a non-problem of low inflation.
    In fact, economic growth, business investment, and real 
wages are picking up momentum and confidence is elevated 
despite the Fed hiking rates. The reason for this is largely 
the government's recent changes to ease the burdensome 
regulations and tax reform prospects.
    Second, the Fed and Congress are really too complacent 
about the Fed's massive balance sheet, particularly amid 
improving economies. And I urge the Fed to gradually eliminate 
its entire mortgage-backed securities holdings. With the 
mortgage market healthy, and housing doing quite well, why is 
the Fed holding any MBS? Why is it allocating credit to a 
sector that doesn't need it?
    The Fed should aim to reduce its balance sheet much more 
than it is currently aiming for. Some Fed members are talking 
about lowering it from its current level to about $3 trillion, 
which would still leave $1 trillion in excess reserves in the 
banking system. We need to assess the costs as well as the 
potential benefits of that. What might be the costs? Its 
involvement in fiscal policy, paying interest on excess 
reserves, the Fed's expanded footprint in financial markets.
    Third, the Fed and Congress should adopt a rule to 
establish and prevent the Fed from ever purchasing equities 
under any circumstances.
    Finally, and most importantly for the future, the Fed 
really needs to reset monetary policy. It should have a 
flexible rules-based approach. And by flexible, what I mean is, 
follow a rule as a guideline that will improve transparency and 
your committee's ability to supervise the Congress while at the 
same time giving the Fed substantial or any types of discretion 
it needs during emergency situations.
    Thank you.
    [The prepared statement of Dr. Levy can be found on page 
112 of the Appendix.]
    Chairman Barr. Thank you all for your testimony. And the 
Chair now recognized himself for questions for 5 minutes.
    So last year, a research team from the University of 
Chicago, Northwestern, and Stanford published an article in the 
highly regarded Quarterly Journal of Economics. And that 
article found that uncertainty about economic policy in general 
reduces American investment, output, and employment.
    And just last month, a team at the Federal Reserve, 
researchers at the Fed found the same problem with monetary 
policy. According to their study, quote, ``uncertainty about 
monetary policy increases credit spreads and reduces output.''
    Dr. Plosser, you have served on the Fed's Monetary Policy 
Committee. You are an accomplished economic researcher. Do 
these findings from both the Fed and from the various 
academics--do these findings seem reasonable to you that 
uncertainty about where monetary policy is going can, in fact, 
slow our economy and constrain credit availability?
    Dr. Plosser. Thank you. I think the answer is yes. They 
certainly make sense. I think there is a challenge in how you 
quantify those effects, but you can see the uncertainty showing 
up in a number of different situations.
    Think about the uncertainty of credit policy, about how 
much MBS was going to be bought and how much not. Were they 
going to rescue Lehman Brothers like they rescued Bear Stearns? 
Without articulating a policy that--strategy that guided those 
decisions, it resulted in uncertainty. The taper tantrum, as 
they said, that occurred.
    All those are examples of effects in the markets that came 
about through some uncertainty or through doubt about whether 
the Fed was going to follow through on some of its 
pronouncements. So I think it is very important that, yes, I 
think that uncertainty can matter. How and when it shows up is 
a bit of a challenge. But that just says that the Fed needs to 
be more strategic in articulating a strategy about how it is 
going to behave if certain things happen.
    Chairman Barr. Thank you. And, Dr. Levin, you, too, are an 
accomplished economic researcher. You have advised both Fed 
Chairman Bernanke and then Vice Chair Yellen. And in addition, 
you coauthored an article last year with the FED UP! 
Coalition's campaign manager calling attention to the 
importance of transparency for our monetary policy authority, 
and acknowledgements for that article included Dr. Bernstein, 
who joins our panel today.
    The article called for the Fed to include in its Monetary 
Policy Report a discussion of any economic models and benchmark 
rules that are used in setting the course of monetary policy. 
Dr. Levin, does the discussion draft that you have before you 
today, the Monetary Policy Transparency and Accountability Act, 
does that bill as currently drafted as you see it effectively 
achieve that goal without mandating the FOMC to follow any 
particular mechanical rule?
    Dr. Levin. Well, thank you, Mr. Chairman. So, first of all, 
I just want to go back to something that Congressman Sherman 
mentioned before. The Fed serves the American public, and I 
think it is appropriate for Congress to think carefully about 
how to make sure the Fed is a fully public institution. That 
was the key point of the paper that we wrote last year. It is 
critical for the Fed to be diverse, regionally diverse, diverse 
in respect to the policymakers and the staff who are working at 
the Fed. Those are all critical issues that were in that paper.
    But on the specific issue, I think that--as I said before--
clarity of a benchmark rule would help serve the public. It is 
related to your question to Dr. Plosser. It would help 
alleviate uncertainty in financial markets, and more generally 
businesses and consumers, the strategy the Fed is following. So 
I think it is appropriate in your draft legislation that the 
Fed have a simple strategy that it can explain to Congress and 
the public.
    Ideally, it would choose that strategy at the beginning of 
each calendar year. And of course, during the year, things 
might--unexpected things might come up, and then the Fed 
officials would explain if they need to change the strategy or 
deviate from the strategy. So in that sense, I agree with you 
that this is a reasonably flexible approach that would help 
improve the Fed's transparency.
    The Fed needs to have discussions among experts like Dr. 
Plosser was, with different points of view. Some people think 
that the Fed should continue to normalize. The policy rule that 
I showed you on the chart, it is not so clear, because if 
inflation stays around 1.3 percent where it is today, and 
output is just growing at a sustainable pace, then that rule 
would say that there isn't necessarily such a strong case for 
the Fed to raise interest rates further at this point.
    But again, that is the sort of debate that should happen at 
the Fed. The Federal Reserve would choose the benchmark under 
your legislation. And it would be able to change the benchmark, 
but it could use that as a point of reference. And so I think 
this would be a very constructive way forward.
    Chairman Barr. Thank you. And I would like to ask the same 
question to the other two witnesses, but my time has expired, 
so we now move to the distinguished gentlelady from Wisconsin, 
the ranking member, Ms. Moore, for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman. If I have 
understood the testimony we have had here today, it seems like 
there is not that much disagreement with regard to the Fed 
having taken the appropriate emergency lending authority. But 
then it seems to differ after that point.
    Dr. Bernstein, let me start with you. I am not trying to 
pick on you, Dr. Levy, but I just underlined some stuff in your 
testimony that I thought was very interesting. You thought that 
the economy's lackluster response to the Fed's stimulus 
highlights the important influences of other policies and 
factors, and you talked again about Dodd-Frank, the government 
tax and regulatory policies at both the State and local levels, 
in both the financial and non-financial sectors, the Fed paying 
interest on reserves, and saying that the banks just can't 
lend, because they are just so burdened by regulations.
    Now, the banks are doing great, last time I checked. They 
are very profitable. And, Dr. Bernstein, I think we heard you 
say and talk about in your written testimony that we saw 
unemployment fall to 4.1 percent. What am I not getting here 
between the two of you?
    Dr. Bernstein. Well, I think you raise some great points, 
and these thoughts came to mind listening to Charles Plosser 
also talk about the impact of Fed-induced uncertainty. In fact, 
unemployment is historically low. We are creating something 
like between 150,000 and 200,000 jobs per month. That is a 
strong clip of job creation at this point in the cycle. I 
suspect all of my colleagues would agree with that.
    The GDP is growing slower than we might like. That is a 
function of low productivity growth. And I haven't heard any 
convincing arguments that would connect Federal Reserve policy 
to that. So I think that if you are looking at economic 
conditions and you are trying to make a case that the Fed is 
somehow doing the wrong thing, you have a very high bar to 
cross.
    As far as the crisis goes, many of the policies that are 
taking a bit of a hit from my colleagues up here have been 
shown not only to be effective in pulling the recovery forward, 
but as I dictate in my testimony, looking at a wide spate of 
research, are associated with much quicker GDP growth, much 
lower unemployment, and including some of the bond purchases 
and emergency spending programs are associated with 
significantly lower interest rates in those sectors that 
clearly were important to growth.
    If anything, it is my view that is what has held back 
faster growth in terms of a policy setting was austere fiscal 
policy, not monetary stimulus.
    Ms. Moore. Right, right, right. OK, so you talked about 
the--what if the Fed had been prohibited, as this legislation 
suggests, from purchasing Treasuries in response to the 2008 
crisis, if we had the policy that would limit its purchases? 
What do you think would have happened?
    Dr. Bernstein. Well, John Williams of the San Francisco Fed 
is I think a very highly respected empirical macroeconomist. He 
argued that the MBS purchases were, quote, the most effective 
part of the Fed's asset purchase programs and that they, quote, 
ended up having kind of a bigger bang for the buck than the 
Treasury purchases.
    I quote research by Alan Blinder, former Vice Chair of the 
Fed, and Mark Zandi, highly respected economic researcher, that 
underscores Williams' finding. Within a short time, they write, 
the MBS purchases by the Fed meant that, quote, homebuyers with 
good jobs and high credit scores could obtain mortgages at 
record low rates which helped end the housing crash.
    And in my testimony, I not only underscore those results, 
but I urge the committee to look at the potential for other 
asset classes that the Fed might be able to purchase, depending 
on the nature of the crisis. And I suggest municipal bonds 
might be one area to look at.
    Ms. Moore. Well, the heart of the financial crisis was in 
the housing sector, so do you agree that that was good for the 
Fed to target that sector?
    Dr. Bernstein. In a sense, we were, quote--and these are 
very big air quotes ``lucky," because the Fed, within its 
charter, was able to purchase assets from the very sector that 
took the hit, the housing sector. That might not be the case 
next time.
    Ms. Moore. OK. Thank you. I think I will yield back the 
balance of my time, since we went over last time.
    Chairman Barr. The gentlelady yields back. The Chair now 
recognizes the Vice Chair of the subcommittee, Mr. Williams 
from Texas.
    Mr. Williams. Thank you, Mr. Chairman. And thank all of you 
for being here today.
    This subcommittee is grateful to have the testimony of so 
many of you, and we appreciate it, on a very important topic. 
As Vice Chairman of this subcommittee, I have been privileged 
to work with my colleagues and industry experts to ensure the 
Federal Reserve does not step beyond its intended purpose and 
authority and continues to play an independent role in monetary 
policy. I consider today's discussion a pivotal step in the 
right direction. I look forward to working with the Chairman 
and distinguished members on these issues.
    So, Mr. Plosser, my question to you is, in March, you 
stated during an interview that you are concerned about 
preserving the fragility of independence as Congress considers 
reforms to the Fed. Now, based upon your previous role as 
president and CEO of the Federal Reserve of Philadelphia, do 
you feel that the reforms being considered today would help to 
maintain that independence?
    Dr. Plosser. Thank you, sir. I do. I think--as I talked 
about Treasuries and about political interference or political 
involvement of Fed and its own decisionmaking and pressures, 
both politically and by the public, I think it is very 
important that we separate clearly the responsibilities of the 
fiscal authorities from those of the monetary authorities.
    The more those responsibilities are blurred and overlap in 
some ways or have dual responsibilities, the harder it is to 
hold either party, Congress or the Fed, accountable for the 
decisions that they make. So it is really important, I think, 
to keep a line between monetary and fiscal policy.
    And one of the things I have argued is rather than 
undermine independence of Fed's monetary policymaking, it would 
be better to narrow the scope of their responsibilities in a 
way that helped them focus on things that they can control and 
ultimately Congress wants them to do. So this separation 
between monetary and fiscal policy I think is an important 
aspect, and I think the way the bills are written and go to a 
Treasuries-only policy and to provide mechanisms for 
emergencies should they arise, it holds the right parties 
accountable at the right time.
    Mr. Williams. OK. Do you think there are any areas where 
you feel that the Fed is currently acting beyond its 
jurisdiction?
    Dr. Plosser. I can't think of any right at the moment. I 
mean, they are beginning to unwind their balance sheet, as was 
said. I think--I wish they could do it a little faster, I 
think, because I think that is--
    Mr. Williams. Could you talk closer to the mic, please? 
Thank you.
    Dr. Plosser. Sorry. I think they are not doing anything 
immediately that is not appropriate. They are unwinding their 
balance sheet. I wish they would focus more on unwinding from 
the MBS and shrinking their balance sheet a little bit faster. 
In fact, I think that is actually more important right now than 
raising interest rates.
    Mr. Williams. OK. Mr. Levy, thank you for being here today. 
In your testimony, you acknowledged--rightfully so--that the 
actions of the Fed following the economic crisis have, in your 
words, extended the role of monetary policy beyond its normal 
scope. You say that the Fed's position that QE3 was responsible 
for increases in employment and economic expansion reflect a 
great deal of hubris.
    I would tend to agree with you. Do you agree with the 
characterization that the purchase of mortgage-backed 
securities by the Fed is a dangerous long-term strategy?
    Dr. Levy. Yes, I agree. Particularly we have--once again, 
the Fed's original purchases of MBS, November 2008, was as 
Chairman Bernanke said, an absolute emergency. The MBS market 
was frozen and really threatened the global financial system.
    We are no longer in an emergency. Financial markets are 
normal. Mortgage markets are normal. Housing market is doing 
just fine. Why is the Fed the largest holder of MBS in the 
world? It just absolutely doesn't make any sense, and it is not 
a good long-run strategy.
    So once again, I think we need to distinguish between the 
proper role of the central bank during an emergency and the 
proper role during normal times. And we are certainly in normal 
times now.
    Mr. Williams. OK, let me ask you another question. Will the 
proposals before us help to successfully unwind the excessively 
large balance sheet of the Fed, do you think?
    Dr. Levy. Excuse me, sir. I didn't--maybe I didn't hear--
    Mr. Williams. Yes, will the proposals before us help to 
successfully unwind the excessively large balance sheet of the 
Fed?
    Dr. Levy. It won't hurt it, but it doesn't directly address 
it. I mean, so right now, the Fed's strategy for unwinding its 
balance sheet ever so gradually and passively effectively 
involves reinvesting all but about 97 percent of MBS and 
Treasury holdings, this very gradual unwind.
    And it is a step in the right direction, but I think it 
should be more aggressive, because once again, I don't think 
the Congress or the Fed are really considering some of the 
risks involved, but not just the Fed stepping over the bounds 
into fiscal policy, but there are just massive risks, including 
the risk that Congress thinks of this as risk-free money to 
spend. And that is very dangerous.
    Chairman Barr. The gentleman's time has expired.
    Mr. Williams. Thank you, Mr. Chairman.
    Chairman Barr. Thank you. The gentleman's time has expired. 
The Chair now recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. Mr. Chairman, I want to thank you for putting 
up a quote from Congressman Brad Sherman when it was your time. 
I can think of no more credible analyst. And you quote me to 
say that Section 13(3) is still a dangerous code section.
    Dr. Bernstein points out that because of the other 
provisions of Dodd-Frank, it is less likely to be needed, which 
means it is less likely to be abused, but it is also less 
likely to be necessary. So the question then is, how can we 
make it even less likely to be necessary? And first thing we 
should do is break up the too-big-to-fail.
    Too-big-to-fail is too big to exist. And we should never 
have a circumstance where the Fed is tempted to use 13(3) or to 
come to us for emergency legislation, as they did successfully 
in terms of passing their legislation, by saying, look, if this 
one entity goes under, it is taking the entire economy with us.
    I would point out that one thing that 13(3) does not have 
is a dollar limit. I remember when the chair of the Fed was 
here and I proposed either a $4 trillion or an $8 trillion 
limit, and the Fed chair would not go along with that, that was 
at a time when it wasn't being used at all. So it is--clearly 
Congress should be consulted at some stage.
    Mr. Plosser, you point out that we should not use 13(3) to 
help any one individual or company. There is a constant debate 
in our society between democracy and rule of the philosopher-
king experts. You would think that democracy had won that 
debate. I am by no means sure.
    I think that there is general agreement that the people of 
the country can elect politicians, so long as those politicians 
don't control anything that is thought to be really important, 
and that if politicians do, that process is known as 
politicization of what actually the philosopher-kings should 
control.
    Mr. Levin, you point out that the Fed shouldn't suffer from 
second-guessing. Welcome to Washington, D.C. I don't think 
there is a member of this committee who is not second-guessed 
on everything they do at all times. And the financial press 
seems to exist for the sole purpose of second-guessing the Fed.
    Speaking of whether the Fed is predictable or not, they are 
absolutely and totally predictable within one quarter of 1 
percent. That is pretty good. Reasonable minds on the Fed can 
differ to the extent of one quarter of 1 percent. They are far 
more predictable than anything else I am aware of.
    The problem with the Fed balance sheet is that they are 
shrinking it when they should be growing it. You can say there 
is no crisis, but wages remain stagnant. That leads to divorce. 
It leads to drug abuse and opioid abuse. It leads to broken 
families. It leads to a host of problems that we would not have 
otherwise. And so it may not be a crisis for the whole country, 
but it is a crisis for millions of families.
    Let's see. So I want to focus--since I have Dr. Bernstein 
here, on the tax provisions. We were talking about those 
earlier. Oh, and I do want to thank, as long as the--I mean, 
the majority has put my quote up on the board knowing that I 
should follow their lead. I have also put my own material up on 
the board.
    And I want to point out that the abandonment of 
quantitative easing is going to cost our Treasury between $80 
billion and $100 billion a year. And we live in this strange 
world where almost everyone except our witnesses are unaware--
and maybe some of our members are unaware--that this money is 
coming into the Treasury. And then our witnesses live in a 
world where that is shameful, because it is unintended, because 
that isn't the purpose of the entity. I would say that if you 
were in the private sector and your byproduct starts making you 
huge amounts of money, that creating the byproduct becomes one 
of the purposes of the company.
    But, Dr. Bernstein, did the models on the effect of this 
tax law, do they deal at all with the increase in the trade 
deficit due to the strengthening of the dollar due to the 
increase in Federal borrowing?
    Dr. Bernstein. I know my time is up. I will answer you with 
one sentence. The theory of the case on the tax cuts is that 
the cut in the corporate rate will draw in capital flows from 
abroad, and those will increase the trade deficit.
    Chairman Barr. Gentleman's time is expired. The Chair now 
recognizes the gentlelady from Utah, Mrs. Love.
    Mrs. Love. Thank you. Thank you all for being here. In 
previous hearings regarding the Fed and monetary policy, we had 
discussions about the Fed being just as bad as everyone else at 
economic and financial forecasting, despite having an army of 
PhD economists running complex computer models.
    Why do you think the Fed is so bad at forecasting? And I 
was wondering if I can get your thoughts on that, Dr. Plosser.
    Dr. Plosser. I think that economists in general are not 
that great of forecasters. That is just the reality of it. Many 
of the things that go wrong with forecasts are the things 
that--are events that occur that weren't forecastable and 
therefore cause problems.
    I also think that actually raises the importance of the 
distinction between what we might call a rules-based strategy 
and a discretionary strategy. Discretionary strategy says the 
Fed will do what it wants to do when it wants to do it for 
reasons that it feels it wants to, OK? That is very 
unpredictable as to how that is going to respond.
    Mrs. Love. Right.
    Dr. Plosser. But the future is uncertain. Always has been 
uncertain and will continue to be uncertain. The value of many 
of the rules-based strategies and the strategies where you 
articulate, well, what will the Fed do if this or this happens? 
Right?
    Mrs. Love. Right.
    Dr. Plosser. That reduces uncertainty. You don't have to 
guess what the Fed will do. It won't make up new reasons for 
doing the thing it is doing. It will be a bit more predictable.
    Mrs. Love. OK.
    Dr. Plosser. Because the future is predictable.
    Mrs. Love. Right.
    Dr. Plosser. So I think that we have to just accept the 
fact that the future is unpredictable and think about 
strategies that allows the Fed to operate in an unpredictable 
world in a predictable way.
    Mrs. Love. OK, I am glad you said that, because I am trying 
to figure out a way to do that. So according to former Federal 
Reserve Board Governor Kevin Warsh, currency stability is one 
of growth's best friends. He also worried that the Fed's 
extraordinary tools encouraging businesses to favor financial 
engineering over capital investment and consequently weakened 
growth in business investments is providing to be an 
opportunity killer for workers.
    Do you agree with that assessment or disagree with that 
assessment? Yes, I am still sticking with you. Yes.
    Dr. Plosser. I apologize. I am sorry. I thought you were 
talking to Dr. Levin.
    I agree with most of it. I do think that many of us said 
during both very low interest rate period when we reached zero 
and during quantitative easing that much of the effects of 
those efforts were absorbed in financial re-engineering by 
companies, restructuring corporate debt policies, and one of 
the big puzzles for the recovery and one of the reasons it was 
slow was the fact that real business investment didn't grow 
like it had in previous recoveries. It wasn't as responsive to 
the typical tools of monetary policy.
    We saw this effect in financial re-engineering, 
restructuring of debt, so forth and so on. So I think there 
is--I share a lot of the concerns in that statement.
    Mrs. Love. OK, I want to get to Dr. Levy, because we have 
had an opportunity to discuss this before. You and I have 
talked in previous hearings about the relationship between 
monetary policy and employment. And why do you think that the 
Fed's policies have been such a boom for what Kevin Warsh has 
referred to as financial engineering, while leaving too many 
Americans underemployed and barely able to make ends meet?
    Dr. Levy. This is a great question. So getting back to Dr. 
Plosser's comment, and Kevin Warsh's comment, it is critically 
important to point out that while the Fed was very successful 
in lowering the real cost of capital, businesses didn't 
respond. And they didn't respond for a host of non-monetary 
reasons, including tax and regulatory policies.
    Now, to your point on employment, there are so many factors 
affecting employment and wages that go so far beyond monetary 
policy. Productivity has been slow. This should be a 
subcommittee on education, because let me give you an important 
statistic. Eighty-five million people, working-age population, 
have a high school degree or less. Wages tend to be low. 
Monetary policy can't do anything about it.
    OK, so--and you could go through a host of other government 
regulations. So this is why I am emphasizing that we all want 
higher standards of living. The issue is, what is the proper 
role of monetary policy? So the Fed could add on QE3 and QE4 
and up to a zillion, and it is just not going to create the 
type of employment gains and wage gains that we all really 
want.
    Chairman Barr. The gentlelady's time has expired.
    Mrs. Love. Thank you.
    Chairman Barr. Gentlelady's time has expired. The Chair now 
recognizes the gentleman from Arkansas--the Chair recognizes 
the gentlelady from Wisconsin?
    Ms. Moore. Yes, thank you so much, Mr. Chairman. Excuse 
this interruption. I would like to ask unanimous consent to 
place a statement in the record from Better Markets. There was 
a quote attributed to them taken from a release issued in 2015 
when the Warren-Vitter bill was introduced. And they just want 
to clarify the differences in that bill and what is being 
offered here today, just for the record.
    Chairman Barr. Without objection. So the statement will be 
entered into the record. And the Chair now recognizes the 
gentleman from Arkansas for 5 minutes.
    Mr. Hill. I thank the Chairman. Appreciate you and Ms. 
Moore convening this hearing. And thank our excellent panel. 
Appreciate all of your participation, as well.
    This subject of Federal Reserve independence from credit 
policy is not new to this subcommittee, and so I am glad we are 
continuing this discussion. As Marvin Goodfriend, a professor 
of economics at Carnegie Mellon, said in 2014, I think it was--
he summarized it nicely, said flexibility and decisiveness are 
essential for effective central banking. Independence enables 
the central bank to react promptly to macroeconomic or 
financial shocks without the approval of the Treasury or the 
legislature. Central bank initiatives must be regarded as 
legitimate by the legislature and the public. Otherwise, such 
initiatives will lack credibility essential for their 
effectiveness.
    The problem is--which is what we are talking about today--
to identify the limits of independence on monetary policy and 
credit policy to preserve a workable, sustainable division of 
responsibilities between the central bank and between the 
fiscal authority. And I think that is really at the heart of 
what we are talking about today.
    And if we have an efficient monetary policy, then it helps 
our private markets allocate goods and services, most readily--
finding their most promising opportunity. And if we engage in 
what we have done over the past 10 years, we really skew the 
price mechanism and skew investment. So I really appreciate 
your testimony, all of your testimony.
    We have seen around the world unprecedented accommodation, 
not only here in the United States, but in central banks around 
the world, where I think Japan now is somewhere approaching 100 
percent of GDP with the size of its balance sheet, and we are 
at about a quarter of our GDP. And in Europe and in Japan 
particularly, we have $12 trillion, $13 trillion of sovereign 
debt at negative interest rates. And we have some of those 
central banks buying corporate debt and equity obligations, 
something that we have certainly been concerned about here.
    So I do think, as the Ranking Member noted, that there are 
concrete reasons why we are having this testimony and thinking 
about why those distorted price signals and the mixing of 
credit and monetary policy are not a good thing for our 
country.
    Dr. Plosser, in talking about Treasury-only, I want you to 
emphasize that we have 40 percent of the new issue MBS owned by 
the Federal Reserve right now. We have about 15 percent of the 
Treasury market, more or less, since the crisis. And I think--
last time I looked at their statement, they own 4 percent of 
other, which includes Maiden Lane, which I guess is the 
residual detritus of Bear Stearns.
    Your concept is that we just simply--whether it is a 13-D 
action or any other action, if we the Fed take on a non-
Treasury asset that in some reasonable amount of time we ask 
the ultimate fiscal authority of the Treasury to take that and 
swap Treasuries back to the Fed, isn't that what we are talking 
about?
    Dr. Plosser. That is the essence of it, yes, Congressman.
    Mr. Hill. So that doesn't--it doesn't per se that--and I 
agree with Dr. Bernstein. We have to be very careful in how 
that is done and the timeframes and we don't want in a crisis 
to make things more difficult. But the ultimate issue is that 
the Treasury, just like if it hadn't done a very effective job 
in getting rid of their final TARP assets, they would be 
liquidating Maiden Lane and not leave that over at the Fed. 
Isn't that an example of what you are talking about?
    Dr. Plosser. That is essentially what I have been arguing, 
exactly that.
    Mr. Hill. And--
    Dr. Plosser. And by the way, there was a memo written 
between the Treasury and the Fed back in--it was in 2009, where 
there was an understanding that the Treasury would do 
everything--because this discussion started way back then--that 
the Treasury would do everything it could to relieve the Fed of 
those private-sector assets, recognizing that they were really 
the responsibility of the fiscal authorities.
    That never happened, obviously. And so I think this is 
really about the process of restoring the Fed so it can 
continue to conduct monetary policy in a manner that is 
appropriate without--with Treasuries, rather than trying to 
deal with the Maiden Lanes of the world.
    Mr. Hill. Well, not only be neutral between the private 
markets on that credit allocation and monetary policy, but also 
put the fiscal authority, which is under the purview of the 
Congress, into whether we are going to spend money on one thing 
or another to, quote, intervene in markets in the time of a 
crisis. I think you make a good point. I yield back, Mr. 
Chairman.
    Chairman Barr. Gentleman yields back. The Chair now 
recognizes the gentleman from Minnesota, Mr. Emmer.
    Mr. Emmer. Thanks to the Chair. And thank you to this great 
panel for being here today.
    I want to followup on Mrs. Love's questions relating to 
Kevin Warsh's quote about financial engineering. And, Dr. Levy, 
since you were on this when the time ran out, can you give me 
some examples of the types of financial engineering that Mr. 
Warsh was referring to?
    Dr. Levy. Quite simply, by keeping rates at zero, so the 
cost of capital is zero, that gives companies the flexibility 
to alter their liability structure, alter their capital 
structure in any way. And the problem you run into is when you 
are running a company, and your Treasury Department starts 
making too much money, and your basic business isn't, things 
aren't good.
    I hate to say this in such lay terms, but if it becomes so 
financially advantageous to take advantage of the current 
financial system to generate profits, then you take your eye 
off your basic business ball. And I think a lot of that 
happened.
    So once again, if we go back to what the Fed tried to do 
and was very articulate about in--say, its QE3, Chairman 
Bernanke when he rolled it out says, OK, QE3, we want to pump a 
huge amount of excess liquidity into the economy, keep rates 
very low, and through forward guidance convince markets we are 
going to keep rates really, really low for a really long time. 
We want to encourage risk-taking and push up asset prices, and 
all of that is going to stimulate aggregate demand.
    It did all of that, but it didn't stimulate aggregate 
demand. Once again, I will emphasize, I understand employment 
went up, but nominal spending growth in the economy didn't 
accelerate. And so when economists talk about distortions, you 
can drill down to what it means for household decisionmaking 
and business decisionmaking.
    Mr. Emmer. So what do you think the Fed should be doing to 
encourage capital investment and job creation instead of this 
financial engineering? Instead of making too much money through 
the Treasury? What would a better approach be?
    Dr. Levy. Well, I think the Fed should proceed to normalize 
interest rates, and that means raising rates right now toward 3 
percent. I don't think it should--which would mean 1 percent 
real rate. I don't think it should be sidetracked from that due 
to low inflation or any international whatever should come up.
    And I think on its balance sheet, the Fed should, once 
again, proceed with a strategy to unwind all of its mortgage-
backed holdings over, say, a period of 5 years, which is 
reasonable. You could do most of it passively. You wouldn't 
have to sell any. And to basically normalize policy and set the 
record straight about what the proper scope of monetary policy 
is, and I think that would reduce uncertainty and build 
confidence in the private sector.
    Mr. Emmer. Well, that is interesting, your last statement, 
because my next question was, in your opinion, has the Federal 
Reserve done a sufficient job of announcing to the American 
people a clear and consistent strategy on how it plans to spur 
economic growth?
    Dr. Levy. The Fed's tried to be transparent, but because it 
has not had a strategy, it is very difficult to be clear. And 
so while they talk about transparency, their message oftentimes 
gets muddled without a strategy. And so once again, I think the 
Fed should--during a healthy economic period, it should stick 
to its monetary knitting and not try to get itself involved in 
fine-tuning the economy and giving mixed signals to markets.
    And I do think the Fed's forward guidance during parts of 
this economic expansion, expressing worries that even a 25 
basis point hike in rates could generate the next recession, it 
is certainly not a positive for confidence.
    Mr. Emmer. It is not helpful. Thank you. I yield back.
    Chairman Barr. Gentleman yields back. The Chair recognizes 
the gentleman from Indiana, Mr. Hollingsworth.
    Mr. Hollingsworth. Well, good afternoon. I appreciate 
everybody being here. It is a rare day when you face four 
doctors sitting across from you. Consider it a pleasant 
experience, right?
    But I wanted to talk a little bit more about what has been 
discussed already. And I think that one of the challenges here 
is--on both sides of the aisle is confusing the counterfactual 
a little bit. We say, oh, growth is non-zero, thus things are 
going great. Bank profits are greater than zero, thus things 
are going great.
    But I think the literature looking back on this shows how 
loan growth has been severely constrained compared to coming 
out of previous recessions. And so one of the things that I 
wanted to talk about was interest on excess reserves and how 
that may be slowing banks' willingness to make loans to other 
creditworthy borrowers and to mobilize those loans into capital 
investment loans.
    As you well said, Dr. Levy, that investment has certainly 
been sub-par compared to previous expansions. And I guess in my 
view, and maybe this has gone out of fashion, but in the super 
long run, it is productivity that generates economic growth. 
And monetary policy has the ability to move things around on a 
temporary basis or on a short-term basis, but ensuring that we 
ultimately create a more productive work force, so we create 
more productive uses for capital is hugely important. I wonder 
if you could talk a little bit about how interest on excess 
reserves may be constraining those investments.
    Dr. Levy. OK, so the Fed pays interest on excess reserves, 
and for--they put this in place in October 2008. And for a 
large portion of the period recently, that interest they pay on 
excess reserves has been above the effective funds rate, and 
therefore that is--it is one factor but not the only factor 
that has probably constrained bank lending.
    I would also note another factor here is that the Fed 
stress tests, while they have been successful in leading 
particularly large banks to raise their capital adequacy 
standards, I can tell you when bank executives deal with stress 
tests all day long--
    Mr. Hollingsworth. Their stress goes up.
    Dr. Levy. --they are in no mood to make a loan. And the 
lenders down the hall say I don't want to make this loan 
because the risk of making a mistake is very, very large. So I 
think it all adds up to--
    Mr. Hollingsworth. If you have a regulatory environment 
that dampens loan growth, and then you have the ability with no 
counterparty risk whatsoever to earn above market rates at the 
Fed, why take on risk without any apparent gain? Right? And, 
Dr. Levin, I was hoping that you might comment on that, as 
well.
    Dr. Levin. Well, I think I agree with you that the interest 
on reserves was, you know, granted by the Congress to the 
Federal Reserve at a time when banks were earning zero 
interest. And that was viewed as a distortionary cost that was 
discouraging banks, and effectively disintermediating funds 
from the banking system elsewhere, because banks are required 
to hold some reserves at the Federal Reserve.
    This is a crucial question. I think that a part of the 
solution to this in my view is that Congress should authorize 
the GAO to do comprehensive annual reviews of all aspects of 
the Fed, including in the monetary policy--including interest 
on reserves. I think there is a real question in my mind why 
the Federal Reserve is paying a significantly higher rate on 
interest on excess reserves compared to, say, the rate in the 
repo market or the Treasury bill market.
    Mr. Hollingsworth. It is certainly something on our minds, 
as well, as we continue to focus on that. Obviously, what we 
want is capital mobilized in the real economy to make 
investments, private-sector investments such that productivity 
will grow over the long run so that we can realize those 
benefits as Solow predicted.
    Anything that you wanted to add to that, Dr. Plosser?
    Dr. Plosser. So I agree with what is been said, but I would 
like to go back to the beginning of your statement and remind 
everybody that one of the dangers that we slipped into during 
this period--and oftentimes do--is relying on the Fed to be the 
solution to all our economic problems. And it is not, and it 
can't be.
    The real key to economic growth is productivity. 
Productivity of the work force--
    Mr. Hollingsworth. Productivity generated by private 
capital making investments, continuing to grow the economy.
    Dr. Plosser. And the Federal Reserve cannot determine that.
    Mr. Hollingsworth. I think that is well said.
    Dr. Plosser. And I think--well, you said it. I was just 
reiterating how important I think it is.
    Mr. Hollingsworth. You know what? I like that even better. 
And I think the addiction to Federal Reserve intervention, 
especially as you well said during positive times of economic 
growth, continues to endanger their ability to come to any sort 
of help during periods of great acute stress.
    Dr. Plosser. This is the most interventionist Fed in 
private markets, even today, than it has been in the last 50 
years, at least.
    Mr. Hollingsworth. Thank you, Dr. Plosser. I yield back.
    Chairman Barr. The gentleman's time has expired. The Chair 
now recognizes the gentleman from Ohio, Mr. Davidson.
    Mr. Davidson. Thank you, Mr. Chairman. And I want to thank 
our guests. I really appreciate your testimony here and in 
writing. And I have learned a lot from some of your other 
writings.
    So, Dr. Plosser, could you elaborate on some of the real 
economic opportunities for American households and businesses 
should they benefit from monetary policy framework that drew a 
brighter line between accountability for fiscal and monetary 
policy?
    Dr. Plosser. Well, I think there are a couple of ways to 
think about that. One, it is separating roles and 
responsibilities and accountability. I think in many cases, 
households are worried a lot about what the Fed's going to do 
next and what it is going to do to interest rates. And frankly, 
I believe the Fed is not as powerful over interest rates and 
the real economy as people seem to believe.
    If you remember, when the Fed began tapering and stopped 
buying assets, it was because it was concerned about interest 
rates, long-term interest rates were going to rise. They 
didn't. They fell for about a year. So I think that this 
fixation on the Fed's ability to control productivity growth, 
real wages, lots of other things is overblown and that we need 
to scale back those expectations and look for things that focus 
on productivity that can make the economy grow. And that is 
what is going to make the real lives.
    The contribution of the Fed is going to be mainly keeping 
inflation low and stable. Alan Greenspan used to say that is--
when inflation becomes a non-issue for people's lives, then we 
are doing OK.
    Mr. Davidson. Terrific. One of the things that have made 
inflation such a constraint thing hasn't really been monetary 
policy, but it has been the strength of the dollar and the 
power of trade. Some of those dynamics that have taken place--
of course, some of that has led to challenges to the U.S. as 
the de facto reserve currency.
    Dr. Levin, I was wondering if you could comment on that, as 
a future challenge, and what role the central banks--in this 
case, the Fed in particular--could play?
    Dr. Levin. Well, I think that the Federal Reserve is the 
most important central bank in the world for sure. And it is 
not just Americans who want to understand better what the 
Federal Reserve does. It is true all over the world. Other 
central banks are also trying to understand what the Fed's 
decision is and what its strategy is.
    So I just--I want to come back to this question about 
strategy for a second. I think one way to think about this--the 
purpose of the legislation you are adopting today is maybe 
relatively innocuous during normal times. Some of it is 
specifically directed toward emergency credit and toward 
actions that would happen in an emergency.
    Even the benchmarks--I think during normal times it is true 
that the--for example, the Federal Reserve barely changed the 
Federal funds rate for a number of years in the 1990's when the 
economy was on a steady course. I think the purpose of this 
legislation is to have it in place the next time around.
    What are the contingency plans the Federal Reserve is going 
to follow? Those should be clarified in advance. I remember, I 
was at the Fed at the time. People referred to it as throwing 
spaghetti at the wall to see what sticks. And that is not an 
appropriate thing to do. It is important for Congress to 
understand ahead of time what the Federal Reserve is going to 
do in an emergency.
    The strategy for monetary policy I think of as a little bit 
like a patient who is a child, and you are the patient's family 
in some sense who needs to consult with a team of doctors that 
you respect and trust, but you want to consult with them and 
understand the strategy that is being followed. The strategy. 
It has to be one strategy.
    And it is absolutely true, the economy has lots of 
uncertainty. Someone asked earlier about forecasting. But a 
good team of doctors are going to say, look, here are some 
risks, we have to take seriously those risks. If this 
materializes, here is the action plan we are going to take. And 
so those are the sort of things I think you are asking the 
Federal Reserve to start doing.
    Again, it is not hawkish or dovish. It is good governance 
here and accountability and transparency. It will help the 
world economy--
    Mr. Davidson. Correct. And so I agree. And I think the 
challenge, when you talk about the Emergency Lending Act, when 
you look back, so this was forward-looking. Now, if you say--
well, let's say there is this accountability and we have to 
check. What do you see the implications of a potential reversal 
with the congressional accountability to say, you have done 
emergency lending, we think that was a bit of an overreach. 
What do you see as the implications for that level of 
accountability?
    Dr. Levin. OK, so the critical thing, again, just use this 
analogy with the patient and the patient's family and the 
doctors. Try to consult ahead of time so that by the time when 
the operation--again, I strongly believe you can't micromanage 
the Fed. It has to be able to make decisions on a day-to-day 
basis. But what the Federal Reserve should be doing is 
consulting in advance to say if this happens, we may need to 
carry out this emergency procedure. And the patient's family 
gives a directive to say, OK, we can live with that.
    So the up-or-down vote that this legislation is proposing 
hopefully what would not happen is a panic, but what would 
hopefully be happening is, oh, OK, the risks are increasing, we 
need to launch this emergency facility, and Congress says, yes, 
you have been explaining that to us for a number of months or 
years, and we are comfortable with your going ahead.
    Mr. Davidson. Thank you. My time has expired. I yield back.
    Chairman Barr. The gentleman's time has expired. The Chair 
recognizes the gentleman from West Virginia, Mr. Mooney.
    Mr. Mooney. Thank you. My question is primarily aimed at 
Dr. Levin. And first, go big green, Dartmouth class of 1993 
here. I will be heading back for my 25th reunion this summer. 
Maybe I will see you up there.
    But you have touched a theme that has been of concern to me 
for a while of Congress delegating, giving up, just receding 
its authority to Federal administrative branches. I see that in 
a lot of places, not just with monetary policy. I see it with 
environmental policy in my State of West Virginia. I have seen 
it with--gosh, even declaring war on foreign countries, going 
to war in foreign countries. I mean, we are seeing it a lot of 
places. And I think Congress needs to reassert itself.
    In the written testimony, I want to reference the written 
testimony from Mr. Bernstein, where he emphasized the 
importance for Congress to maintain central bank--for Congress 
to maintain central bank independence and, quote, efficient 
functionality, close quote. So, Dr. Levin, does the draft 
legislation that you reviewed for the hearing--do you believe 
it compromises monetary policy independence or compromise 
efficient functionality, as your colleague has expressed a 
concern about?
    Dr. Levin. OK, look, there is the broader picture and then 
there are the details. Let's just start with the broader 
picture. That is why I started with the exhibit. Basic 
management principles. The Congress has to be the boss. The 
Federal Reserve is not an independent branch of government. It 
reports to you. And it is absolutely essential for you who are 
elected officials by the public--I agree with what Congressman 
Sherman said before. You are the ones who are elected by the 
public to oversee the Federal Reserve. It cannot be truly 
absolutely independent. It has to be conditionally, 
operationally independent.
    Now, I think this draft legislation at a fundamental level 
is consistent with the operational independence. In fact, I 
think, as Dr. Plosser said, I think it would strengthen in some 
ways the operational independence of the Fed.
    There are details of some of these things about how many 
days, for example, before the congressional approval has to be 
given, which exact types of securities under which conditions 
can be purchased. I hope that--I understand that your committee 
is going to be marking up this legislation next week. It seems 
to me that there may be some room for consultations and 
compromises, as you always do. But, again, this seems to me as 
a matter of good governance and transparency and 
accountability, and I hope there is a way forward to enact 
this.
    Mr. Mooney. OK, thank you. Mr. Chairman, I will yield back. 
Give my time back to the Chair.
    Chairman Barr. The gentleman yields back. The Chair 
recognizes the gentleman from North Carolina, Mr. Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman. And thank each of 
you for being with us today. It is an honor to have you join 
this committee.
    I would like to follow up, if I could, on some of Mr. 
Williams' questioning. Mr. Levy, if you could just expand 
further on what you believe to be the economic risks that are 
created by maintaining a balance sheet of the current size?
    Dr. Levy. There is economic and interest rate risk, and 
there is also political risk. As far as the economic risks go, 
the Fed at its peak remitted about $115 billion, I think in 
Fiscal Year 2015. Now it is remitting about $85 billion. It is 
paying IOER, and bond yields have come down some.
    This crosses the monetary boundary of policy into fiscal 
policy. If it sounds OK because it reduces the budget deficit, 
but that is temporary, and it is very risky, because as I 
noted, if interest rates rise by 1 percent, which is very 
consistent with the Fed's expectation that rates are going to 
rise, and inflation is going to go to 2 percent, then that is 
going to add $1.6 trillion to the deficits. And so that is a 
risk.
    The other risk is political. And that is it is too easy for 
Congress to look at this as risk-free money and to spend it, 
and to look at the Fed as a source of risk-free money. And 
doesn't this jeopardize the independence of the Fed? And Dr. 
Plosser pointed out that in December 2015, the Fed--in order to 
pass the FAST Act, the Congress actually borrowed some of the--
took some of the Fed's assets. And this is just inappropriate. 
It is an inappropriate use of monetary policy.
    And so the Fed by doing what it is doing has these 
political and economic risks. And it is kind of egging on the 
Congress to take advantage of it in bad ways.
    Dr. Plosser. Excuse me, can I--
    Mr. Pittenger. Please, Dr. Plosser.
    Dr. Plosser. --elaborate a little bit as an example? The 
danger is--with the last time I testified here last year one 
time, I got asked, well, why shouldn't the Fed fund our 
infrastructure projects by blowing up their balance sheet some 
more? There is a real problem in many central banks around the 
world with exactly that.
    The Bank of Switzerland, for example, has a very large 
balance sheet. It is mostly made up of foreign reserves, 
currency reserves. They are in a deep political battle because 
some parties within Switzerland want to use that balance sheet 
to invest in green energy, Swiss companies, other types of 
activities in the name of diversifying the Swiss National 
Bank's balance sheet.
    If the Fed maintains a large balance sheet that is not tied 
to monetary policy, the use of that balance sheet can--the 
temptation to use that for other purposes is going to be great. 
And I think the idea of shrinking the balance sheet and tying 
it to monetary policy will constrain that activity and actually 
protect the Fed from abuses and prevent it from undertaking its 
own abuses of its balance sheet.
    Mr. Pittenger. Yes, as a follow up, would you say, then, 
that it is time for the Federal Reserve to get out of the 
business of engaging in credit policy?
    Dr. Levy. Yes. The Fed should set out a strategy to wind 
down its MBS holdings. There is no reason at all for the Fed to 
hold MBS, unless in an emergency situation. And it can do so 
over, say, a 5-year period through passively unwinding the 
portfolio in order to give the mortgage market time to adjust. 
It need not sell any to do that.
    Dr. Bernstein. Can I make a quick comment, if that is OK?
    Mr. Pittenger. You can.
    Dr. Bernstein. Any time the Federal Reserve engages in 
monetary policy, it is raising or lowering interest rates, and 
that is credit policy. So I am not sure I understand this 
distinction at all.
    Chairman Barr. The time is--I am sorry.
    Mr. Pittenger. Quickly.
    Chairman Barr. Quick answer. The time of the gentleman has 
expired. So quick answer.
    Dr. Levy. OK. The quick answer is the Fed by holding MBS 
securities is specifically biasing the mortgage market at the 
expense of other credit markets.
    Mr. Pittenger. Thank you. My time is expired.
    Chairman Barr. The gentleman yields back. The Chair now 
recognizes the Chairman of the Capital Markets Subcommittee, 
the gentleman from Michigan, Mr. Huizenga.
    Mr. Huizenga. Thank you so much. Sorry, I was a bit late 
earlier. I was--actually had a couple of bills on the floor 
that we were moving forward with. And those duties kept me 
there.
    Before I launch into it, I thought it was interesting, the 
Ranking Member submitting a statement from Better Markets 
rebutting themselves, basically a situation where they believe 
found themselves inadvertently supporting us and what we are 
doing. And heaven forbid. We wouldn't want to actually come to 
consensus and move forward on something.
    So whether it is Warren-Vitter or Barr-Moore, I don't care. 
Whatever the title and label might be, let's get some of these 
things done that have broad, wide consensus, and not be 
political about it. So off of my soapbox on that.
    Dr. Levy, just want to touch base. Obviously, you watch 
financial markets around the world and on a regular basis and 
see the real effects, how monetary policy increases those 
spreads and decreases economic growth. You have talked about 
this in the past, and I am curious if you could just comment 
how important it is for this legislation to sustain or even 
improve upon the stronger economic data, which we have seen 
over the last couple of quarters.
    Dr. Levy. I think by normalizing monetary policy it would 
take away the monetary crutch from the economy and financial 
markets. It would not harm the economy, and it would lead 
financial markets to be much healthier. The other point I would 
add is by--and here I just applaud what Dr. Levin has 
emphasized--if the Fed actually had a single, understandable, 
and cogent strategy, it would certainly make it easier for the 
Fed to convey that message. It would build confidence.
    And once again, the proper role of the Fed, we have seen it 
go far beyond its scope. Its discretionary policy has created 
uncertainty. And I would really like to see more of a strategic 
approach that lays that foundation for the economy to grow at a 
healthy rate. And financial markets adjust.
    Mr. Huizenga. I think many of us are looking forward to 
just the strategy as you just laid out. Dr. Plosser, good to 
see you again. And I want to talk a little bit about your 
article you wrote for the Hoover Institute entitled ``Why the 
Fed Should Only Own Treasuries.'' And that article, I want to 
quote you, if that is all right. ``History teaches us unless 
governments are constrained constitutionally or by statute, 
they often resort to the `printing press' to avoid making tough 
fiscal decisions. But in a democracy, independence must come 
with limitations on the central bank's authorities and 
discretionary powers. Otherwise, central bankers can use their 
powers to venture into policy realms unrelated to monetary 
policy, especially fiscal policy, which more appropriately 
rests with elected officials.''
    And as you know, obviously those Fed balance sheets not 
only increased in size during the financial crisis, they added 
large quantities of non-Treasury securities, I think as you put 
it. Your article highlights that the more troubling loans under 
Section 13(3) that, quote, ``amounted to debt-financed fiscal 
policy without the explicit authorization of Congress.''
    So, Dr. Plosser, in your opinion, what are the downside 
risks of blurring these lines of accountability for monetary 
policy and fiscal policies?
    Dr. Plosser. Well, I think as we have been talking off and 
on this afternoon, it is that blurring that is dangerous. 
Because what that does is confuses both in the eyes of the 
fiscal authorities and the monetary authorities and the public 
who is responsible for what. And who do we hold accountable for 
what?
    And when you put taxpayer money at risk and you buy 
portfolios of private assets on the banks' part, you are, in 
fact, putting taxpayer money at risk. And you are investing in 
whatever it happens to be, MBS mortgage portfolios or whatever 
happened to be on the balance sheet that the Fed chose to buy, 
you are taking fiscal actions.
    Mr. Huizenga. Is your concern sort of a winners versus 
losers? And these governments kind of picking it? Or just in 
general, and I am a huge fan of the Swiss normally, but I hope 
that they don't head in the direction that you described.
    Dr. Plosser. Well, they are getting pressure to head in 
that direction. That is absolutely true.
    Mr. Huizenga. Yes, and we have had that. And the downside 
of that seems--we are allowing a central bank to venture into 
some waters that it just has no business going. Is that your 
opinion?
    Dr. Plosser. Yes, it is. And it is a bit of a slippery 
slope, because it is very tempting on the part of both parties 
to let that--but then it is--again, it is hard to hold the Fed 
to make it transparent and to hold it accountable for the kind 
of things that you actually want them to be focused on. And the 
same thing for the fiscal authorities, by the way.
    Mr. Huizenga. Thank you. Thank you, Mr. Chairman.
    Chairman Barr. The gentleman's time has expired. And the 
members have requested a brief second round of questions, if 
the witnesses will indulge us with their considerable 
expertise. This has been a lively discussion. We appreciate 
your expertise so much that members would like to ask you a 
second round of questions.
    So I will start that second round by yielding myself an 
additional 5 minutes. Picking up where Chairman Huizenga was 
going right there, on the downside risk of blurring the lines 
of accountability for monetary and fiscal policies, Dr. 
Plosser, let's talk about the legislation that is before you 
right now. And the Independence from Credit Policy Act, which 
is one of the three bills there, how well does that legislation 
help the Fed avoid that downside risk of blurring the lines of 
accountability between monetary policy and fiscal policy?
    Dr. Plosser. This is a topic I have been talking about 
actually since 2009, was when I first raised this question and 
asked for a new accord. And the problem is that what I see in 
the legislation and what I have advocated in the past has been 
this idea that, look, 13(3) had never been used since the Great 
Depression. It is not something you are going to rely on very 
frequently.
    But my view is that it shouldn't be the authority of the 
Fed to lend money for the purchase of Bear Stearns and buy 
assets, private-sector assets. That belongs to the fiscal 
authorities. And so I actually think that the treasury 
secretary needs to instruct the Fed to carry out such an 
action. Maybe it was all decided in consultation with the Fed 
and other regulators about what needed to be done. But it needs 
to instruct the Fed so that this is not--the Fed can't take 
this on its own.
    Chairman Barr. And, Dr. Plosser, is it an appropriate 
solution to require the swap of Treasuries for mortgage-backed 
securities?
    Dr. Plosser. The Fed is the fiscal agent in many cases for 
the government, in most cases it is, and so it is appropriate 
for the Treasury to instruct the Fed to do something on behalf 
of the government as their fiscal agent, but then to keep the 
Fed whole, you would engage in a swap of those private-sector 
securities for Treasuries, and then the Fed is back to where it 
was before, and it is not responsible for that. It is in the 
Treasury that makes it--
    Chairman Barr. So the fiscal responsibilities remain with 
Treasury.
    Dr. Plosser. Exactly.
    Chairman Barr. The agency responsibilities, the monetary 
policy responsibilities remain at the Fed. Let me also allow 
you to respond to the typical criticism of Fed reform 
initiatives, and that is that when Congress intervenes in this 
way and proposes reform, that, in fact, Congress is 
compromising the independence of the Fed. Could you elaborate 
on your argument that no, in fact, this legislation preserves 
the independence of the Fed?
    Dr. Plosser. So that is exactly right. I think it helps the 
Fed, because what it does is when Congress, for example, comes 
to the Fed and say, we want you to pay for part of this 
transportation bill or infrastructure bill or what have you, 
would you buy some municipal bonds or something from--to help 
bail them out, the Fed has a basis for saying no, that is not 
in our purview.
    Chairman Barr. OK, so now, Dr. Bernstein and Dr. Levy had 
an exchange there. Dr. Bernstein made the point that 
productivity levels are not the result of unconventional Fed 
policy or discretionary Fed policy. Dr. Levy--perhaps 
productivity--low productivity is a function of a lot of things 
other than monetary policy. I think there is an agreement on 
the panel that that is the case.
    But could you address the issue of what unconventional 
monetary policy does to impede maximum economic outcomes?
    Dr. Levy. OK, so unconventional monetary policies during 
emergencies don't impede. During normal periods, they distort 
financial markets by keeping rates too low, having excess 
liquidity in the economy, and this leads to a misallocation of 
resources.
    But I would say as long as inflation stays low, it doesn't 
have a significant depressing impact on productivity. 
Productivity is a function of a whole host of other issues. I 
would say there is the long-run risk of being excessively easy. 
It catches up with you, and it could lead to undesired 
increases in inflation and interest rates.
    Chairman Barr. And so what I have heard here today from the 
witnesses is that the principal contribution that monetary 
policy can make--however limited that contribution can be--is 
primarily that it can provide--it transmits price signals, 
clear price signals to actors in the private economy, which in 
turn can provide a level of certainty for households, 
investors, and small businesses.
    Dr. Levy. Yes.
    Chairman Barr. And I think that is what we are trying to 
get at with the strategy-based monetary policy. My time is 
expired on my second round. And I would like to now recognize 
the Ranking Member for an additional 5 minutes.
    Ms. Moore. Thank you so much. Let me just open up by asking 
Dr. Levin a question. You are a former staffer at the Federal 
Reserve, so I think what you might have to tell us is very 
instructive. You attached to your written testimony a paper 
that you coauthored with several other people stressing the 
importance of diversity at the Federal Reserve. What was the 
essence of that, just very briefly? Why do you think that that 
is important? And what were you talking about in terms of 
diversity?
    Dr. Levin. OK, well, there are a couple of dimensions of 
this that are important. Jordan Haedtler, who is one of the 
coauthors, is actually sitting here. Valerie Wilson, from 
Economic Policy Institute, was the other coauthor. The three of 
us wrote this together.
    But let me just give you a couple of kind of key points. 
First, as I said in my statement, the Fed is America's central 
bank. It serves the whole public. Its decisions affect 
everyone. So there is a kind of chain of accountability here. 
The Federal Reserve reports to Congress. But the Federal 
Reserve serves the public.
    And so it is critical for the Congress to ensure that the 
Federal Reserve is serving the public as well as possible. A 
key part of our report is that the regional Federal Reserve 
banks are legally private institutions. Now, it was set up that 
way for good reasons in 1913, but you should understand that as 
of today, the Federal Reserve is the only major central bank in 
the entire world, the only one, that has such a significant 
private component to it. And so I think it is important for 
Congress over time to revisit this issue.
    One possibility is to appoint a centennial commission, some 
people have raised this idea, and that could be, I think, a 
bipartisan initiative to say that we need to reconsider this. 
Some of the rationale for what the Fed did 100 years ago, it 
was banker to the banks. That was its primary role.
    Ms. Moore. OK. Thank you. That is very helpful.
    Dr. Levin. Yes, OK.
    Ms. Moore. Dr. Bernstein, outgoing Fed Chair Yellen has 
shared with us many times that she thinks--she believes that 
inequality is very dangerous. And so as I have thought about 
the testimony here today and an assessment and evaluation of 
what the Fed did do or didn't do, one of the things I know is 
our dual mandate to look out for those who are unemployed.
    Can you share with us whether or not you think some of 
these analyses are the way they are because there is sort of 
not a deference to that other dual mandate? And what is your 
view on inequality and the danger to our role?
    Dr. Bernstein. Well, I am glad you raised that, because I 
think that those kinds of concerns have been really 
conspicuously absent from this discussion so far. And it is a 
glaring absence.
    So much of the discussion has focused on credit markets, on 
how the financial sector is doing, on messages and signals and 
certainty to the financial markets. That is all critically 
important, no question. But, in fact, if you look at the sector 
the economy that has really been doing great in recent years, 
it is precisely that side. The share of national income going 
to profitability, the equity prices of the financial markets 
have been extremely strong.
    Where we have problems--even at 4.1 percent unemployment--
is pockets of weakness in labor demand, pockets of severe 
weakness in income growth. And it is that reason that the 
Federal Reserve has engaged in lots of the initiatives that 
have taken a hit here today from my colleagues, because 
interest rates are stuck at zero, the Federal funds rate has 
been stuck at zero, and so they needed to engage in other 
techniques in order to try to further stimulate the economy to 
reach those who have been left behind.
    If you listen to Janet Yellen talking about either this 
problem, the employment side of the mandate, or inequality, you 
will very clearly hear those concerns. And so we have to 
acknowledge that there are a lot of people who are missing in 
this room today from this discussion, and they are the people 
who are helped most by the employment side of the dual mandate. 
It has been a critical omission, I think, for much of our 
discussion.
    Ms. Moore. Anybody dying to say anything up there?
    Dr. Levin. Well, I just want to reinforce what you said 
about diversity. It is critical for the members of the FOMC and 
the Federal Reserve Board, but all the regional Fed presidents, 
to have geographical diversity. That is why it was created as a 
regional system. That is really important. They need 
professional diversity, background, different educational 
backgrounds. It is great to have a Congressman--
    Ms. Moore. You need any black people on the--
    Dr. Levin. Absolutely. Of course.
    Ms. Moore. OK, OK. My time is expired.
    Chairman Barr. The gentlelady's time has expired. The Chair 
recognizes the gentleman from Texas, Mr. Williams.
    Mr. Williams. Thank you, Mr. Chairman and Mr. Levin. The 
FOMC proposal before this body today seeks to increase 
transparency and make clear the way that the FOMC makes its 
decision. In your testimony, you discussed the fact that the 
Fed's monetary policy strategy is not well understood.
    So in what ways does the current communication policy keep 
the boss or Congress, as you say in your testimony, well 
informed about the FOMC strategy?
    Dr. Levin. OK, so, first of all, the draft legislation 
requires that the Federal Reserve have a clear strategy. That 
would already be a significant step forward. The legislation 
requires that the strategy should be--identify a specific 
policy instrument, which could be the Federal funds rate, it 
could be the repo offer rate. It might be something else over 
time. OK. It identifies a specific policy tool that it is going 
to use, identify specific indicators.
    Now, as Jared said, and I agree with him on much of this, 
there were times in the past 5 years the unemployment rate was 
not a very sufficient indicator of the labor market. President 
Trump has emphasized that himself, that there are broader 
measures of unemployment. Jared has emphasized in his 
writings--we call it U-6--you know, that includes involuntary 
participation and people on the sidelines.
    So, again the Federal Reserve needs to have a clear 
strategy or explain to the public how it is responding to these 
indicators. It should be a small number, simple, clear 
indication.
    Again, I want to come back to the analogy about the 
patient. A child, I have a 9-year-old son, so this is--it hits 
home for me. When the patient is sick and you go to a team of 
doctors, it is a difficult illness. You want a clear strategy, 
and you want--the doctors have to consult with the patient's 
family. Everyone understands that.
    And we are talking here--as Ranking Member Moore said, we 
are talking--and Jared said--this affects all Americans, in the 
inner city, it affects small businesses, it affects large 
corporations, it affects people in other countries, too. And so 
it is really critical here that this team of doctors on the 
FOMC has a clear strategy that the public, the Congress, 
financial markets, small-business people, everyone can 
understand that strategy and the debate about it.
    I am totally in favor of second-guessing, by the way. I 
second-guess the Fed myself. But if you don't have a clear 
strategy, then you can't debate about it. And it needs to be a 
public debate about what the Federal Reserve is doing.
    Mr. Williams. OK, well, let me ask you this. If the Fed 
takes a data-driven approach to monetary policy, as they have 
said they do, does it follow that allowing a clear picture in 
predicting future policy direction will be beneficial to 
investors and the economy as a whole?
    Dr. Levin. Yes. And again, during normal times, this may 
not be so complex. There may be periods when the Federal 
Reserve's policy rate is more or less normal and more or less 
stays within a narrow range over a period of time. What we are 
really talking about here with strategy is times when things 
are not normal. How is the Federal Reserve going to respond to 
that?
    I keep coming back here to contingency planning, because, 
again, this is a good business principle for a nonprofit 
organization, too, to be thinking about, what might go wrong? 
And how will the Federal Reserve respond to that? I call it 
stress tests for monetary policy. You are the boss. You should 
be asking the Federal Reserve, if we have a recession next year 
or 2 years from now or 5 years from now, what are the Fed's 
plans? How will it respond? Is it going to do more QE? Is it 
going to go to negative interest rates? These are critical to 
the whole American public and to the global economy. You are 
the boss. You have to get clear answers from the Federal 
Reserve on these issues.
    Mr. Williams. OK, Mr. Chairman, I yield my time back. Thank 
you.
    Chairman Barr. The gentleman yields back. The Chair 
recognizes the gentleman from Arkansas, Mr. Hill, for another 5 
minutes.
    Mr. Hill. Well, I have enjoyed this discussion. Of course, 
when you are with the deliberative body of second-guessers, we 
can relate to your comment. We are experts at it.
    But one of the biggest impacts of the last 10 years of 
Federal Reserve policy is skewing benefits to the carry trade 
and to stock market investors and 401(k) investors and driving 
down interest rates on real estate to, I would assume, non-
economic type levels. So there has been a lot of beneficiaries.
    And I agree that they really have not reached a lot of the 
working people, because we have not seen wage growth or 
productivity growth, to Dr. Levy's comment about aggregate 
demand has not reacted to this 10 years of extraordinary 
stimulus, unseen in history. I mean, we are--we have never seen 
lax monetary accommodation like we have seen now.
    I want to switch bills for a minute, Mr. Chairman, and talk 
a bit about the emergency lending proposal that is before us. 
And of course, the theme that we had both in the Choice Act and 
here is well-collateralized loans not to insolvent entities at 
a penalty interest rate and at a short-term duration, but this 
bill limits that to financial institutions, supervised by the 
Fed, for example. I would be curious of the panel's view. Is 
that too narrow? Should 13(3) be limited only to commercial 
banking institutions or their holding companies, to be 
specific?
    I would just like a view from all four of you. Dr. Plosser?
    Dr. Plosser. I think that is a bit of a difficult question. 
And I do think that if you accept the notion, as the Fed has 
argued, that there are a lot of non-banks, for example, who are 
involved in financial markets heavily. And so-called shadow 
banking system, how far do you extend this safety net?
    The problem is, I think, is--if it is a safety--the 
Bagehot's rule for--Walter Bagehot rule for emergency lending 
was, as you said, lend freely at a penalty rate to solvent 
institutions. So now what we really are talking about is, do 
you want the Fed lending to insolvent institutions? And if so, 
what is the reason for that? And what is the rationale for 
that?
    That is not what lender of last resort means. So I think we 
have to be careful about how we do structure this.
    Mr. Hill. Well, I would just--the bill before us, though, 
is--the borrower is affirming the borrower is not insolvent. 
So, I mean, the real question I have is, should 13(3) be 
extended to a non-banking entity?
    Dr. Plosser. I guess, if I had to--given the way it is 
structured, I would say no. I don't think it is necessary.
    Mr. Hill. Thank you. Dr. Levin?
    Dr. Levin. Well, I just want to reiterate something that 
Dr. Bernstein said, which is most other central banks around 
the world do have broad authority in an emergency of what kinds 
of actions they can take. And it is not just about lender of 
last resort, and it is not just about too-big-to-fail.
    What is the most important thing the central bank does? Is 
to keep a stable unit of account. We call it price stability. 
That is part of the Fed's mandate, OK? That is the single 
critical thing. And in a really severe short, like we had in 
the Great Recession, or even going back to the Great 
Depression, we didn't have price stability in the Great 
Depression. Prices fell 25-30 percent.
    So it is critical for the central bank to have enough tools 
so that when there is that kind of shock that it can make sure 
that the price level comes back to a stable level. So, again, I 
think there is a case for a centennial commission that would 
think carefully about what can we learn from history, what can 
we learn from other central banks, what can we learn from what 
worked and didn't work in the past recession? Frankly, I think 
the Fed itself needs to do more lessons learned and come back 
to you. You are the boss. And help think through--we want to be 
prepared for the next crisis.
    Mr. Hill. I agree. Let me hear--
    Dr. Bernstein. I can be very brief. I can be very brief.
    Mr. Hill. --from Dr. Bernstein and Dr. Levy.
    Dr. Bernstein. Yes, I think that is too restrictive. And I 
think the Fed needs to be able to lend beyond services--may 
well need to lend beyond financial services in emergency 
because we just don't know the sector from which the next 
emergency will hail--
    Mr. Hill. Thank you, Dr. Bernstein.
    Dr. Bernstein. --much as Andy suggested. One quick thing. I 
would encourage you to read what I wrote in my testimony about 
the penalty rate. I actually think the penalty rate in this 
proposal is less well thought through than the one in the 
Warren-Vitter proposal.
    Mr. Hill. Thank you. Quickly, Dr. Levy?
    Dr. Levy. No further comment.
    Mr. Hill. OK, thank you very much. I yield back, Mr. 
Chairman.
    Chairman Barr. Gentleman yields back. Chair recognizes the 
gentleman from Ohio, Mr. Davidson.
    Mr. Davidson. Thank you, Mr. Chairman. Thank you all for 
taking additional questions.
    As we talk about second-guessing, I guess that is part of 
the whole point of this approval process or validation that 
Congress agrees with what the Fed has done in this emergency 
lending authority. And, Dr. Levy, I was just curious if you 
could comment on how the market might react to this period. If 
this becomes law, we know that it is sort of a conditional 
action, so it should be extraordinary. There are a lot of 
safeguards. It is a very high threshold that the Fed would go 
through to give approval. But once they do, how do you feel the 
market would react in this period before it is validated? And 
then what if Congress does say, no, we are not going to give 
our consent to that? Because it requires positive action.
    The asset would presumably be worth even less. How do you 
see the market reacting to that?
    Dr. Levy. I can only have two comments in response to your 
question. And one is, what is the source and character of the 
crisis? And I would just note the next crisis is likely to be 
unlike the prior one.
    And the second point I would make is, the markets are going 
to move in response to the crisis. They are not going to wait 
around for the Fed and the Congress to respond. It will, of 
course, respond to whatever the Fed does, but the markets are 
going to--they sense things. They are going to front run 
whatever you--they are going to be way out in front of you.
    Mr. Davidson. Well, there will probably be indicators of 
what they expect Congress will react to, the new dynamic.
    Dr. Levy. Well, wait, let me qualify what I just said. The 
markets would take comfort if they perceived that you had 
thought through logical strategies in response to different 
types of crises. The markets would certainly take comfort in 
that. And also, I think communications about what you are going 
to do are critically important.
    Mr. Davidson. So I thank you for that. And, Dr. Levin, you 
commented a little bit about the desired goal of something 
clear in advance. But here it is retroactive. It is second-
guessing something that has been done by the Fed. And so, Dr. 
Plosser, I am curious your thoughts, in terms of you are 25 
days past, and the country can sense Congress isn't going to 
take action, isn't going to validate that. Is the timeframe 
important? Is it 30 days? Is it 6 months? Does it have to be 
paid back within 30 days? How important is this to the market 
function?
    Dr. Plosser. So let me start by pointing out that one of 
the values of doing this is that you set out a process about, 
if such and such happens, this is what we are going to do. 
These are the steps that are going to be followed. That is 
known in advance, all right? So markets will build in to their 
own assessments--it is like a bankruptcy law. A bankruptcy law 
says if a firm goes insolvent, all debt is put into a holding 
pattern until you can sort through the assets and liabilities 
and figure out who gets paid. That is the law. So pricing of 
those assets in advance understands that step.
    Well, this is kind of the same idea. Here is what is going 
to happen, so you--by laying it out in advance what the rules 
of the game are going to be, markets will price that, in 
effect, well before the event actually happens. So that is 
going to make it less stressful than it might otherwise be if 
this came as a surprise of some kind.
    The second step, as you were getting to, well, how long 
should this holding period be on assets, until Congress 
decides? Well, again, I think that knowing this process in 
advance--and there is a lot in the bill about how Congress is 
expected to behave and how quickly they are supposed to make a 
decision on this, I think all of that is going to be filtered 
in, and the markets will make an assessment whether they think 
this is a good case for a rescue or not. And it is going to 
make the hurdle rate for the secretary of treasury to back the 
Fed in doing this. If he doesn't think he can--if it is not a 
good case and he is not going to be able to make the case to 
Congress, then it might not happen.
    But these rescues shouldn't be made easy. They are not--you 
don't want to encourage them and make them so easy that it just 
happens. So I think, yes, it is not perfect, but I think as 
long as you lay out the process, things will work as we think 
they should. That is all.
    Mr. Davidson. It is a good principle. Thank you, and my 
time is expired.
    Chairman Barr. Time is expired. The Chair now recognized 
for our final 5 minutes of questioning the gentleman from 
Indiana, Mr. Hollingsworth.
    Mr. Hollingsworth. Best for last here. You know, one of the 
things that fascinates me about economics generally, something 
you guys know far more about than I do, is just kind of its 
reflexive nature. And one of the things I really worry about, 
right--it has been a long time since I took Econ 101, but 
permanent income hypothesis, right, and the idea that we are 
working down somebody's curve in their preferences for 
consumption today versus saving for consumption later. But with 
the extended period of time with which we have undertaken these 
extraordinary measures, whether instead of working down that 
curve, we are bending that curve and permanently distorting 
their impression and their tradeoffs between present and 
future, and it will be difficult for us to either work that 
curve again or bend that curve back, such that monetary policy 
in the future might have meaningful impacts in the short run, 
at least.
    And I wonder kind of what your, Dr. Levy and Dr. Plosser, 
view on that is and whether we are, indeed, beginning to shape, 
permanently alter or misshape expectations for the future?
    Dr. Levy. I think yours is a very valuable observation. And 
I would just bring out something that I am very concerned 
about, and that is the Fed's policies--and it has had the 
Federal funds rate below inflation now ever since 2008--and its 
massive balance sheet, people who have come to believe that 
this is normal. And when I say people: Households, businesses, 
savers, and financial markets.
    And that potentially raises the costs of exiting and going 
back to normal. I would say so far the Fed has been lucky. And 
I would argue also that the Fed has been able to be leisurely 
in its exit because its policies to stimulate aggregate demand 
haven't worked. So I am very concerned about your point that 
this--we perceive current policy as normal. It is absolutely 
not.
    Mr. Hollingsworth. Right. Dr. Plosser?
    Dr. Plosser. So I agree with what Dr. Levy just said. I 
think the other thing is to recognize that during this period 
there has been this huge conflict in public policy. There is 
the Fed trying to cut interest rates to zero to encourage 
people to spend, spend, spend today, don't save, don't save, 
spend. And then there is the pressure on banks to not lend, not 
lend, not lend, unless you are really certain.
    So we are trying to--we are tugging at each other in ways 
that are--it is confusing, I think, to the general public in 
terms of, how are they supposed to respond to all this?
    Mr. Hollingsworth. Right, right.
    Dr. Plosser. And you are telling the banks not to lend and 
build capital, and telling the public, no, no, no, borrow all 
the money you can. And I think that that tension is reflected 
in part--what you are saying is, are changing people's behavior 
about their preferences for borrowing--spending today versus 
spending tomorrow? And since we wiped out a whole bunch of 
wealth in the housing crisis, now what do households typically 
want to do? They don't want to spend. They need to rebuild 
their wealth.
    And so there are all these sort of conflicts that are going 
on that have, I think, been not very helpful at the bottom 
line.
    Mr. Hollingsworth. And, Dr. Levy, something you have talked 
about a few times and I just wanted to bring back that point--
look, we talk about the philosophy behind whether the Fed 
should be involved in such activities that add to such huge 
amounts to the Treasury, but also how those seemingly large 
amounts might pale in comparison to the potential losses, 
should interest rates begin to rise and accelerate steadily. 
And so an old adage someone once told me was be careful picking 
up pennies in front of a freight train. Even if you get it 
right a dozen times in a row, you don't want to be wrong once. 
And I think that your point about that several times is ringing 
true in my mind.
    And, Dr. Levin, something I wanted to bring up and just 
talk a little bit about. You have pushed hard for transparency 
and pushed hard for a cogent strategy. And one of the things 
that is challenging about this, right, is knowing what success 
looks like, because everybody has a different vision of what is 
success. What is full employment, right? 4.1 percent seems like 
full employment, but you look at U-6, you look at wage growth, 
and maybe we aren't really at full employment. All of these 
things.
    So to me, that harkens back to the need for a cogent 
strategy and transparency about how we will work these 
variables into something, right, whether that is a Taylor rule, 
whether it is some discretion around the Taylor rule, just some 
understanding of these are the things we consider important and 
these things moving in these directions will give us 
indications, but not a clearly defined ``end goal,'' if you 
will, since we will never be able to measure what success 
really looks like.
    Is that something that you would endorse theoretically?
    Dr. Levin. Yes, and I would just underscore something I 
think Dr. Plosser said earlier. The Fed's job is not fine-
tuning the last tenth of a point on the unemployment rate or 
the inflation rate. But it has a crucial job. And I think part 
of the balancing you are talking about is the risk management.
    Again, like a team of doctors, to explain and say we have a 
bunch of diagnostic tests, but they are a little bit hard to 
read here. This is an unusual case. And so we are going to be 
keeping a close eye on the patient. And if this indicator goes 
up any further, we are going to have to take some action. Those 
are the sort of clear strategies I think your draft legislation 
is exactly looking for the Fed to start doing.
    Mr. Hollingsworth. Perfect. Thank you, Mr. Chairman. And I 
yield back.
    Chairman Barr. Thank you. The Chair yields back. And I 
would like to thank all of our witnesses for your illuminating 
testimony here today. And, Dr. Levin, appropriate that we leave 
the hearing with another reference to the excellent analogy of 
the patient and the family. And for laying the foundation for a 
strategy-based monetary policy that can help lift our economy.
    With that, without objection, all members will have 5 
legislative days within which to submit additional written 
questions for the witnesses to the Chair, which will be 
forwarded to the witness for their response. And I ask our 
witnesses to please respond as promptly as you are able.
    This hearing is now adjourned.
    [Whereupon, at 4:27 p.m., the subcommittee was adjourned.]

                            A P P E N D I X



                            November 7, 2017
                            
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