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








       A FURTHER EXAMINATION OF 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

                             SECOND SESSION

                               __________

                            JANUARY 10, 2018

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-69



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]












                                   ______
		 
                     U.S. GOVERNMENT PUBLISHING OFFICE 
		 
31-325 PDF                WASHINGTON : 2018                 




























                 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

                     Shannon McGahn, 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:
    January 10, 2018.............................................     1
Appendix:
    January 10, 2018.............................................    35

                               WITNESSES
                      Wednesday, January 10, 2018

Baker, Dean, Co-Director and Senior Economist, Center for 
  Economic and Policy Research...................................     8
Michel, Norbert J., Director, Center for Data Analysis, The 
  Heritage Foundation............................................     5
Pollock, Alex J., Distinguished Senior Fellow, R Street Institute     7
Selgin, George, Senior Fellow and Director, Center for Monetary 
  and Financial Alternatives, The Cato Institute.................    10

                                APPENDIX

Prepared statements:
    Baker, Dean..................................................    36
    Michel, Norbert J............................................    43
    Pollock, Alex J..............................................    51
    Selgin, George...............................................    56

              Additional Material Submitted for the Record

Moore, Hon. Gwen:
    Written statement of Americans for Financial Reform..........    64
    Written statement from Josh Bivens, the Economic Policy 
      Institute..................................................    65
    Written statement from Jared Bernstein, the Center on Budget 
      and Policy Priorities......................................    70
    Written statement of the Conference of State Bank Supervisors    72
    Written statement of the Center for Popular Democracy's Fed 
      Up coalition...............................................    74

 
       A FURTHER EXAMINATION OF FEDERAL RESERVE REFORM PROPOSALS

                              ----------                              


                      Wednesday, January 10, 2018

                     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 2:03 p.m., in 
room 2128, Rayburn House Office Building, Hon. Andy Barr 
[chairman of the subcommittee] presiding.
    Present: Representatives Barr, Williams, Lucas, Huizenga, 
Pittenger, Hill, Emmer, Mooney, Davidson, Tenney, 
Hollingsworth, Hensarling, Moore, Foster, Sherman, Green, 
Kildee, and Vargas.
    Chairman Barr. The committee will come to order.
    Without objection, 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.
    We have had some unscheduled votes come up throughout the 
day. We may have that again. So I apologize in advance if this 
is a bit of a start-and-stop hearing because of that. We will 
try to avoid that if we can.
    This hearing is entitled ``A Further Examination of Federal 
Reserve Reform Proposals.''
    I now recognize myself for 5 minutes to give an opening 
statement.
    Today we are turning the corner on monetary policy. We will 
soon have a Federal Reserve Board Chairman and additional 
confirmations to the Board of Governors. We are excited about 
what personnel change can bring in terms of a more reliable 
monetary policy for American economic opportunities, and we 
remain interested in bipartisan reforms that can improve the 
deliberative processes and policy transparency.
    During today's hearing, we will consider important 
legislative proposals to improve the rules of the game for both 
our monetary policymakers and Congressional overseers. These 
reforms provide for a monetary policy that is better informed 
about economic conditions throughout the country while focusing 
our Federal Reserve on what it can do and only what it can do.
    Monetary policy can appear complicated, but unless we 
fortify its ability to signal when and where goods and services 
can further productive opportunities, we cannot fulfill our 
economic potential.
    Two years ago, the House of Representatives passed our Fed 
Oversight Reform and Modernization Act. As we meet today, we 
have a chance to move this and related legislation even 
further.
    Some detractors persist with the mantra that except for the 
Fed's great monetary distortion our economy would have fallen 
into another Great Depression. According to them, we should be 
thanking the Fed, not reforming it. It is true that our economy 
is performing better than many, but ``better than many'' is the 
wrong metric for America and Americans. The right measure is 
whether we are performing as strongly as we can. The fact that 
our recent recovery was considerably weaker than previous post-
war rebounds says that we can and must do better to live up to 
our potential.
    The good news is that we are off to a strong start. The 
past 2 quarters of 3-percent growth are promising, and the New 
York Fed's latest ``Nowcasting Report'' predicts an even 
stronger 4-percent growth rate for the last quarter of 2017.
    Our efforts going forward will be more effective if we 
understand how we got here. And we got here in considerable 
part by asking more from our monetary policy than it could 
possibly deliver.
    Some of us remember the Rock and Roll Hall of Fame band 
Jefferson Starship. One of their hit songs includes the phrase, 
``If only you believe in miracles, we'd get by.'' A catchy tune 
for sure, but monetary policies should not depend on miracles.
    Year after year, the American people were told that the 
promise of unconventional policies would appear soon. Almost a 
decade out of the financial crisis, we must stop waiting and 
start doing. Legislation under consideration today builds on 
the foundation of local knowledge and individual incentives--
fundamentals that are absent from too many of our policy 
discussions.
    Some economists insist that our best days are behind us. 
They tell us that the most unconventional policy responses to 
the Great Recession had nothing to do with an economy that had 
to wait for the last election to start showing signs of life. 
By ignoring that macro performance depends on micro decisions. 
Top-down models assume a supernatural capacity to optimally 
control the most complex of systems, our economy.
    But just as businesses cannot continually hide 
mismanagement behind financial engineering, governments cannot 
support true prosperity by opportunistically diverting scarce 
resources into politically favored national income accounts.
    Almost a decade out from the Great Recession, returning to 
a more reliable monetary policy is long overdue. It is time to 
abandon the improvisation at the Federal Reserve. Monetary 
policy distortions helped us get into the recession. More of 
the same will not bring a stronger recovery.
    Monetary policy needs to return to doing what it can and 
only what it can, and that is consistently producing an 
efficient exchange medium so that real goods and services, 
which include labor, can freely engage in their most promising 
opportunities. Legislation that we will consider today does 
just that.
    And, with that, I now recognize the gentleman from 
California, Mr. Sherman, for 2 minutes for an opening 
statement.
    Mr. Sherman. Thank you. Mr. Chairman, you have made me feel 
very old. I have always known them as Jefferson Airplane.
    Chairman Barr. Yes.
    Mr. Sherman. The legitimacy of our Federal Government and 
all of our governments is based on the theory of democracy. But 
the enemies of democracy take refuge in the belief that, while 
we elect some people, we don't actually let them make the 
important decisions and that the elitists will control the 
entities that make the important decisions.
    The most important decisions discussed in this room are 
those made by the Fed, where the elected representatives of the 
people get to kibitz but the people actually making decisions 
are well removed from the concept of democracy. But many of 
them are, in fact, appointees of the President, but others are 
selected by the theory of one bank, one vote. Now, we now have 
A, B, and C levels, but that B level is selected by the banks, 
meaning that critically important Governmental decisions are 
made where the banks have votes and the people don't.
    This is exacerbated by the fact that not only do we have 
this one bank, one vote, but California gets as much clout as 
areas that have less than half of its population. So democracy 
is thwarted in two ways. We ought to move forward to the idea 
that Government decisions in America should be made by those 
selected by elected leaders.
    In addition, the Fed made as much as $100 billion in a year 
profit by mistake. If we have the people of America told that 
they are allowed to look at what the Fed does, and not just on 
the Bloomberg channel, we would be insisting that any policy 
that produces $100 billion for the Federal Government be looked 
at as a policy that might generate $100 billion profit for the 
Federal Government and that that cannot be ignored just because 
the elitists say they did it by mistake, therefore it doesn't 
count.
    I look forward to a true democracy in this country. I am 
old, but I hope I am young enough to see it.
    I yield back.
    Chairman Barr. The gentlemen's time has expired.
    The Chair now recognizes the distinguished Ranking Member 
for an opening statement for 3 minutes.
    Ms. Moore. And thank you so much, Mr. Chairman and 
committee. And thank you to our witnesses gathered here.
    Today, we are going to be examining several pieces of 
legislation that are identical or substantively the same as we 
have considered before, and legislation that I am opposed to. 
Collectively, this legislation represents the proverbial 
solution in search of a problem. Of course, these solutions 
aren't the problem, in many of cases.
    Let us take legislation that would allow bankers even more 
power to appoint the president of the Federal Reserve banks. 
Now, this would unwind an important Dodd-Frank reform to 
diversify the concerns and opinions the Fed considers. This 
reform is a slap in the face to Americans. And it is so 
counterintuitive to the majority, to the Republican talking 
points about being tough on Wall Street, and then turning 
around and betraying our constituents by selling them out to 
Wall Street banks.
    Deutsche Bank just got done being mired in lots of 
scandals, including rigging LIBOR and helping Russians launder 
money and get around U.S. sanctions. Deutsche Bank also makes 
questionable loans to our President, and this committee refuses 
to even look into those loans for Deutsche Bank. In other news, 
our President waives part of the punishment imposed on the 
Deutsche Bank, even as he owes it hundreds of millions of 
dollars in loans that have raised a lot of eyebrows.
    These bills make little sense in the best of times, like 
appropriating money for the Fed. The GOP has weaponized funding 
regulators at the request of the regulated entities. Ask the 
SEC (U.S. Securities and Exchange Commission), ask the CFTC, 
and, of course, you could also ask the EPA.
    Given the ongoing scandal of global money laundering and 
illicit financing and pay-for-play in this Administration, I 
simply don't want to open the door for another avenue for these 
obstructions of sound financial regulation by appropriating the 
Fed.
    I have letters to enter into the record, Mr. Chairman, 
without objection. I have Americans for Financial Reform, a 
statement; and a statement from Dr. Josh Bivens, Research 
Director of the Economic Policy Institute; and a statement from 
Dr. Jared Bernstein, economist at the Center on Budget and 
Policy Priorities.
    Chairman Barr. Without objection.
    Ms. Moore. Thank you. And I yield back.
    Chairman Barr. The gentlelady yields back.
    Today, we welcome the testimony of four distinguished 
witnesses.
    First, Dr. Norbert Michel, who is the Director of the 
Center for Data Analysis at The Heritage Foundation, where he 
studies and writes about financial markets and monetary policy. 
Before rejoining Heritage in 2013, Michel was a tenured 
professor at Nicholls State University's College of Business, 
teaching finance, economics, and statistics. Dr. Michel holds a 
doctoral degree in financial economics from the University of 
New Orleans. He received his bachelor of business 
administration in finance and economics from Loyola University.
    Mr. Alex Pollock is a distinguished Senior Fellow with the 
R Street Institute, providing thought and policy leadership on 
financial systems, cycles of booms and busts, financial crises, 
risk and uncertainty, central banking, and the politics of 
finance. Alex joined R Street in January 2016 from the American 
Enterprise Institute, where he was a resident fellow from 2004 
to 2015. He previously was President and CEO of the Federal 
Home Loan Bank of Chicago from 1991 to 2004. He received his 
bachelor's from Williams College, has a master's in philosophy 
from the University of Chicago, and a master of public 
administration degree in international affairs from Princeton 
University.
    Dr. Dean Baker is the Co-founder and Co-director and Senior 
Economist at the Center for Economic and Policy Research. His 
areas of research include housing and macroeconomics, 
intellectual property, Social Security, Medicare, and European 
labor markets. Dean previously worked as a senior economist at 
the Economic Policy Institute and as an assistant professor at 
Bucknell University. He has also worked as a consultant for the 
World Bank, the Joint Economic Committee of the U.S. Congress, 
and the OECD's Trade Union Advisory Council. He received his 
B.A. from Swarthmore College and his Ph.D. in economics from 
the University of Michigan.
    Last but not least, Dr. George Selgin is a Senior Fellow 
and Director of the Center for Monetary and Financial 
Alternatives at the Cato Institute and Professor Emeritus of 
economics at the University of Georgia. His research covers a 
broad range of topics within the field of monetary economics. 
Selgin retired from the University of Georgia to join Cato in 
September 2014. He has also taught at George Mason University, 
the University of Hong Kong, and West Virginia University. He 
holds a B.A. in economics and zoology from Drew University and 
a Ph.D. in economics from New York University.
    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.
    And, Dr. Norbert Michel, you are now recognized for 5 
minutes.

                 STATEMENT OF NORBERT J. MICHEL

    Dr. Michel. Thank you.
    Chairman Barr, Ranking Member Moore, Members of the 
committee, thank you for the opportunity to testify today.
    Though I am the Director for the Center for Data Analysis 
at The Heritage Foundation, the views that I express in this 
testimony are mine. They should be not construed as 
representing any official position of The Heritage Foundation.
    Congress could enact many reforms that would improve the 
transparency of the Federal Reserve's operations as well as the 
Fed's accountability. What should be obvious but what is often 
ignored is that the Federal Reserve is, in fact, a creature of 
Congress. Any operational independence that the Fed enjoys 
should definitely apply to the Fed's independence from the 
Executive Branch. The Federal Reserve, however, should always 
remain accountable to the public through its elected 
representatives in Congress.
    One set of possible reforms deals with changing the Fed's 
ability to pay interest on reserves, a power that Congress 
granted to the Fed ahead of its original schedule during the 
2008 crisis.
    The record shows that Congress did not make this policy 
change to alter the Fed's main tool for monetary control, but 
that is exactly what the Fed ended up doing once it had this 
authority, ultimately using it to supplant, rather than 
supplement, its traditional open market operations. Though 
certainly not Congress' intent, allowing the Fed to pay 
interest on excess reserves has enhanced the Fed's ability to 
allocate credit to specific entities rather than to provide 
systemwide liquidity.
    Congress now has several options to hold the Fed more 
accountable and fix this problem: One, allow the Federal Open 
Market Committee, rather than the Board of Governors, to set 
the rate paid on reserve balances; two, clarify the statutory 
meaning of ``general level of short-term interest rates'' so 
that the Fed cannot pay above-market rates; and, three, remove 
the Fed's authority to pay interest on excess reserves 
entirely, which would be my preferred of the three.
    Another set of reforms deals with restoring the original 
decentralized model that Congress used to create the Federal 
Reserve System. The present-day Fed looks and acts quite 
differently than the system that Congress originally created, 
and one of the glaring differences is the increased 
centralization of the Fed's power inside Washington, D.C.
    In 1935, Congress replaced the original Federal Reserve 
Board with the seven-member Board of Governors that exists 
today, and it also created the Federal Open Market Committee. 
From its creation, all seven members of the board, the New York 
Fed president, and four rotating district bank presidents have 
had voting seats on the FOMC (Federal Open Market Committee), 
thus ensuring that the Fed's power would remain centralized in 
Washington, D.C.
    Congress can implement several policies in this area to 
rectify that mistake, thus restoring the more decentralized 
approach. For instance, Congress could change the makeup of the 
committee so that one representative from each district bank 
has a voting seat or, instead, increase the number of voting 
seats that district banks have on the committee to either six 
or seven to lessen the advantage. Either way, Congress should 
ensure that the New York Fed is no longer the only district 
bank with a permanent voting seat on the committee.
    Finally, because Congress has delegated so much authority 
to the Fed, there are several other smaller policy changes that 
Congress should make to ensure more transparency and better 
accountability.
    One straightforward improvement would be to subject the 
Fed's nonmonetary policy functions to the regular congressional 
appropriations process, thus giving Congress a powerful tool to 
hold the Fed accountable.
    Another direct fix, to amend the Federal Reserve Act to 
define the blackout period surrounding the committee meeting 
and to specify exactly which types of communications apply. The 
existing type of vague and unclear requirements always hinder 
transparency.
    Two additional improvements that I would identify would be 
requiring Congressional testimony from an alternate Fed 
official when the Vice Chair of Supervision is vacant and, 
second, holding all Federal Reserve staff to the same 
disclosure and ethics standards as those of the SEC.
    Ultimately, Congress could improve accountability and 
transparency of the central bank by narrowing the Fed's scope 
of responsibilities so that it is no longer a regulator at all, 
thus focusing the central bank on monetary policy, which is 
what it was supposed to do originally. This change would fit 
naturally with giving all Fed district banks a voting seat on 
the FOMC, ending in better representation for all areas of the 
country.
    Thank you, and I look forward to any questions you may 
have.
    [The prepared statement of Dr. Michel can be found on page 
43 of the Appendix]
    Chairman Barr. Thank you.
    Mr. Pollock, you are recognized for 5 minutes.

                  STATEMENT OF ALEX J. POLLOCK

    Mr. Pollock. Thank you, Mr. Chairman, Ranking Member Moore, 
and Members of the subcommittee.
    The proposals under consideration today are all parts of a 
timely and fundamental review of America's central bank. From 
James Madison, who wanted to protect the new United States from 
a ``rage for paper money,'' as he said, to now, money has 
always been and is an inherently political issue, involving 
questions not amenable to technocratic solutions but requiring 
judgments about the general welfare.
    For example, Congress instructed the Federal Reserve in 
statute to pursue, quote, ``stable prices,'' unquote. But the 
Federal Reserve decided on its own that the term ``stable 
prices'' means perpetual inflation at the rate of 2 percent a 
year. This reasonably could be viewed as a contradiction in 
terms but certainly raises the question, who should have the 
power to make such judgments, the Fed by itself or the 
Congress, having heard from the Fed and others?
    Under the Fed's current fiat money regime, we have 
experienced the great inflation of the 1970's, the financial 
crises of the 1980's, the bubbles and crises of the 1990's and 
2000's, and the radical asset price inflation of the 2010's, 
the outcome of which is as yet unknown. Since the economic and 
financial future is unknowable, the Fed is incapable of knowing 
what the results of its own actions will be.
    How should the Fed be accountable for its various 
judgments, guesses, and gambles, and to whom? And, at the same 
time, how should it be accountable for how it spends the 
taxpayers' money and how it makes decisions?
    I believe there are four general categories for this 
discussion: One, the accountability of the Federal Reserve; 
two, the checks and balances appropriate to the Fed; three, the 
centralized versus Federal elements in the Fed's own structure; 
and, four, dealing with uncertainty.
    On accountability, the power to define and manage money is 
granted by the Constitution to Congress. There can be no doubt 
that the Federal Reserve is a creature of and accountable to 
the Congress, just as Norbert said. And the Congress, of 
course, represents the people, for whom the nature and 
potential abuse of their money is always a fundamental issue.
    The primary central bank independence problem, in my view, 
is independence from the executive. The executive naturally 
wants its programs and especially its wars financed by the 
central bank as needed, and a lot of history demonstrates this. 
And some of it is in my written testimony.
    I think it is important to realize that the Federal Reserve 
Reform Act of 1977 and the Humphrey-Hawkins Act of 1978 were 
attempts under Democratic Party leadership to make the Fed more 
accountable to Congress, just as we are talking about today. 
This was the right idea, but I think it is fair to say these 
attempts were not successful.
    The most fundamental power of the legislature is the power 
of the purse, and Congress can use this essential power for Fed 
accountability. Every dollar of Fed expense is taxpayer money 
and would go to the Treasury's general fund if not spent by the 
Fed on itself. Since it is taxpayer money, the proposal to 
subject the Fed to appropriations, in my view, makes sense.
    Checks and balances are essential to our constitutional 
Government and to every part of it, including the Federal 
Reserve. Since the Fed has amassed huge regulatory power, the 
Congress should require additional reporting regarding the 
Fed's regulatory plans and rules, especially in its new role as 
the dominant regulator of systemic risk.
    The original Federal Reserve Act of 1913 tried to balance 
regional and central power, hence the name Federal Reserve 
System, not Bank of the United States. This theory lost out in 
1935, but, in my view, adjustment back to a more dispersed 
power within the Fed would make sense.
    And three of the draft bills under consideration move in 
this direction and are, in my opinion, all appropriate reforms, 
as are anything which increases the intellectual 
diversification of Federal Reserve operations. And a number of 
the bills do that.
    In sum, the Federal Reserve needs to be accountable to the 
Congress, to be subject to appropriate checks and balances, be 
understood in the context of inherent financial and economic 
uncertainty, and would benefit from rebalancing of centralized 
versus Federal elements in its internal structures.
    Thank you for the opportunity to share these views.
    [The prepared statement of Mr. Pollock can be found on page 
51 of the Appendix]
    Chairman Barr. Thank you, Mr. Pollock.
    Dr. Baker, you are recognized for 5 minutes.

                     STATEMENT OF DEAN BAKER

    Dr. Baker. Thank you, Chairman Barr and Ranking Member 
Moore. I appreciate the opportunity to address you and the 
Members of the subcommittee.
    I will address the seven proposals that you asked us to 
speak about, but first I would like to give at least my 
assessment of how we should think about the Federal Reserve. 
And basically what I would say is that we have, to some extent, 
an anachronism.
    The Federal Reserve Act, of course, created over a century 
ago, and, at that time, it was created as a mixed public-
private entity. And, in that way, the Federal Reserve Bank is 
really an outlier among other central banks, pretty much all of 
which--I am saying ``pretty much all'' because there is maybe 
one I don't know of--but pretty much all of which are fully 
public entities. So if you look at the European Central Bank, 
the Bank of England, the Bank of Canada, these are all fully 
public entities.
    So the idea that we have a mixed public-private entity is 
really an anachronism that I think is historically the wrong 
direction and certainly puts us out of line with the rest of 
the world.
    And it creates this perverse situation that Representative 
Sherman referred to in his opening comments where we have banks 
that have a say on monetary policy and, perhaps even more 
perversely, have a role in naming their own regulators. While 
we would, of course, welcome the input of the financial sector, 
the banking industry in monetary policy, as we would other 
sectors, the idea that they have particular insight that we 
need in the structure of monetary policy I find hard to 
understand.
    Furthermore, in terms of having them select their own 
regulators, we all recognize that the affected industry--the 
pharmaceutical industry is going to lobby the Food and Drug 
Administration to promote its interests, or the 
telecommunications industry will lobby the Federal 
Communications Commission. We don't let them pick 
commissioners. And that is, in effect, what we have in the 
current structure of the Fed.
    So, from that vantage point, my view is we should be moving 
toward a more strictly public Fed. And I put these categories 
and proposals into two categories: One, shifting power back 
toward the banks, away from the appointed Governors; and, two, 
questions of governance, more narrow questions of governance 
that--well, I will come to those--I think, in some ways, can be 
seen as perhaps harassing the Federal Reserve Board.
    On the first question of putting more power in the hands of 
the banks, well, allowing Class A directors to vote for bank 
presidents is very directly giving more power to the banks over 
selecting the regional bank presidents. That was a very 
conscious decision in the Dodd-Frank bill, to move in the 
opposite direction, to try and take away power from the banks 
in that selection, although, as Representative Sherman pointed 
out, they still select the Class B directors, which means they 
have half the votes when you have a bank president being 
considered.
    The second issue, have all the bank presidents vote on the 
FOMC, again, this is a question of giving more power to 
unelected officials, giving power--or I shouldn't say 
``unelected officials''--people who are not appointed through 
the democratic process. It is giving power to people who are 
selected by the banks. I cannot see why you would want to go in 
that direction.
    The third in that vein is to have the FOMC determine the 
interest rates on reserves. This is a little perplexing to me 
because, in my view, the key question here is the policy 
instrument, what policy being decided, which, of course, is in 
general the interest rate on overnight money, the Federal funds 
rate, and the interest rate on reserves is a way to target 
that. So I am a little bit at a loss, what the committee or 
Congress should be looking to do by having the whole FOMC vote 
on interest rates on reserves. It just seems to me a rather 
peculiar policy.
    I should also point out, there seems to be some idea here 
that the Fed has failed. And, obviously, one could argue 
whether it has failed or succeeded. But if we look at which 
direction it has gone, it has failed to hit its inflation 
target. We have consistently been below the 2-percent target. 
And I realize some people may not like 2 percent as an 
inflation target, but the Fed, of course, has been very public 
about that. And Congress could tell them they should have 
another target if Congress felt otherwise. So they have been 
very open on that being their target. They have been under that 
target consistently ever since the Great Recession.
    And we did an analysis looking at votes of bank 
presidents--dissents, I should say, of bank presidents in the 
last 25 years, the whole period for which reasons were given. 
And of 72 dissents, 64 were for more restrictive monetary 
policy, meaning they would have given us still lower inflation. 
So, in other words, they would not have been right. If we gave 
them more votes, we would be more wrong than we are today.
    Very quickly, dealing with the other issues, I will just 
mention the appropriations issue. I do think Congress does have 
control over the purse. On the other hand, I would hate to see 
it decided on a year-to-year basis. What I thought--I mention 
it in my testimony--there is a formula for appropriating money 
or allocating money to the Consumer Financial Protection 
Bureau. I would recommend something comparable to the Fed, that 
whether it be--you could target to GDP. I mean, one could pick 
other targets, say, one-tenth of 1 percent GDP, that might be 
allocated to the Fed. And that way, you could say, this is how 
much money you have, and Congress will have exercised its 
function here.
    Thank you.
    [The prepared statement of Dr. Baker can be found on page 
36 of the Appendix]
    Chairman Barr. Thank you, Dr. Baker.
    Dr. Selgin, you are recognized for 5 minutes.

                   STATEMENT OF GEORGE SELGIN

    Dr. Selgin. Thank you, Chairman Barr, Ranking Member Moore, 
and distinguished committee Members. I appreciate the 
opportunity to testify today on the topic of reforming the Fed. 
My remarks will concern exclusively the proposal to make the 
FOMC officially responsible for setting the interest rate paid 
on banks' excess reserves.
    From the mid-1930's until recently, legal responsibility 
for monetary policy has rested with the FOMC, the Federal Open 
Market Committee, which, as has been mentioned, is made up of 
the seven members of the Federal Reserve Board of Governors, 
plus five regional Federal Reserve bank presidents.
    During the last crisis, however, that longstanding role 
came to an abrupt, if little noticed, end. The proximate cause 
of this change was the 2008 Emergency Economic Stabilization 
Act. That act allowed the Fed to immediately begin paying 
interest on banks' reserve balances, as the 2006 Financial 
Services Regulatory Relief Act would have allowed them to do, 
though not starting until 3 years later.
    As the name of the 2006 act suggests, its purpose was to 
relieve banks from burdensome reserve requirements by modestly 
compensating them for holding required reserves. Interest on 
reserves was not supposed to be a means for regulating monetary 
policy. For these reasons, the interest rate on reserves was, 
by law, not supposed to, quote, ``exceed the general level of 
short-term interest rates.'' Consistent with the 2006 act's 
limited aims, it allowed the Board of Governors, rather than 
the FOMC, to set interest rates on banks' reserve balances.
    Now, the Emergency Economic Stabilization Act left these 
provisions unchanged. But in October 2008, when that act went 
into effect, the Fed had entirely different reasons for wishing 
to pay interest on banks' reserve balances. Primarily, it 
wanted not merely to compensate banks for holding required 
reserves but to entice them to accumulate excess reserves that 
were coming their way as a result of the Fed's emergency 
lending.
    Thus, the payment of interest on excess reserves, 
particularly, was transformed into a monetary policy tool. Open 
market operations, the FOMC's traditional means of regulating 
monetary policy, in turn became useless, as banks found holding 
reserves more lucrative than lending them.
    Now, the Fed relies almost exclusively on changes in the 
interest rate it pays on excess reserve balances to adjust its 
policy stance, where that interest rate is determined not by 
the FOMC but by the Federal Reserve Board.
    So, while the FOMC is supposed to be in charge of monetary 
policy by law, the Federal Reserve Board is really in charge. 
The regional bank presidents have, in consequence, been 
deprived of one of the more important roles assigned to them 
when the Fed was founded and continued by subsequent revisions 
of the Federal Reserve Act.
    I believe that Congress has a clear duty to put 
responsibility for the monetary policy decisionmaking back 
where it is supposed to have been all along. It can do this in 
either of two ways: First, Congress might revise the 2006 
statute so that it allows the FOMC, rather than the Federal 
Reserve Board, to set interest rates on bank reserve balances, 
which is the proposal that has been made.
    Alternatively, though, Congress might prevent the Fed from 
continuing to use interest on reserves as a monetary policy 
tool. It can do that also in two ways: It could restrict 
interest payments to required reserve balances. Alternatively, 
it could strictly enforce the provision in the 2006 act saying 
that interest rates should not ``exceed the general level of 
short-term interest rates'' by specifically defining that 
phrase to mean that the rate of interest on reserves should not 
exceed the Federal Reserve Bank of New York's benchmark Broad 
Treasury Financing Rate, which is a perfectly useful indicator 
of general short-term rates.
    For reasons I spelled out in detail in my July 2017 
testimony to this committee, I favored the latter set of 
alternatives.
    Thank you very much.
    [The prepared statement of Dr. Selgin can be found on page 
56 of the Appendix]
    Chairman Barr. I thank all of you for your testimony. And 
we will begin, and I will recognize myself for 5 minutes of 
questioning.
    Let me start with you, Mr. Pollock. You have heard the 
opening statement of my good friend, the Ranking Member. You 
have heard criticisms from others challenging this legislative 
proposal that would subject the regulatory and supervisory 
functions of the Fed to the Congressional appropriations 
process.
    Could you respond or would you be willing to respond to the 
critique that subjecting the Fed to the appropriations process 
would politicize the Federal Reserve System or compromise, 
quote, ``Fed independence''?
    Mr. Pollock. Mr. Chairman, I would be very happy to do 
that.
    Let me repeat to begin with that the Federal Reserve is a 
creature of Congress and should be a creature of Congress and 
accountable to the Congress, and the power of the purse is the 
fundamental power of Congress.
    In this way, I think the proposal takes us to exactly what 
the constitutional design is--that is to say, the Congress is 
responsible for the definition of money and the management of 
money, in which the Federal Reserve is its helper. And the 
notion that the Federal Reserve or any Government body should 
be independent of the Congress is, in my opinion, a grave and 
very costly mistake.
    Chairman Barr. Thank you.
    And I would note that that legislative proposal does not 
tinker with the monetary policy functions of the Federal 
Reserve. It relates specifically to Congressional oversight of 
the regulatory functions and operations of the Federal Reserve.
    Could you comment also or elaborate on your testimony that 
dispersed power is important for a monetary policy authority 
and whether the legislation under consideration today can 
provide for a more fully informed monetary policy?
    Mr. Pollock. Mr. Chairman, I think the fundamental truth 
that has to be confronted, as I tried to suggest in my 
testimony, is that everything about monetary policy and the 
economic and financial future is subject to extreme 
uncertainty. It is not a matter which can be delegated 
successfully to experts. And it doesn't matter how many 
hundreds of economists the Federal Reserve hires; they don't 
get it any more right than anybody else does when it comes to 
knowing what should be done.
    Therefore, in my opinion, diversification of the Fed's 
intellectual and informational deliberations is essential. That 
is the single best thing, in my view, you can do to combat the 
fundamental uncertainty.
    And having the Federal system with all banks involved--and 
I think all banks voting also makes sense--as well as 
empowering the other Governors, the non-Chairman Governors of 
the Federal Reserve, to carry out their own research and 
projects helps increase that intellectual diversification. You 
might still not get it right, but at least you will have a 
greater variety of thought and information to help in your 
efforts.
    Chairman Barr. Thank you very much.
    And, Dr. Michel, you heard what Dr. Baker's concerns were 
with respect to restoring the authority of Class A directors to 
select district bank presidents. I think his argument is that 
you don't want the banks themselves to be selecting their 
regulators.
    But my question to you is, are you aware of any actual 
conflicts of interests that may have motivated this section of 
Dodd-Frank, or was this silencing of district bank shareholders 
to further centralize--was the goal to further centralize the 
selection of district bank leaders in Washington? And what is 
the advantage of having a decentralized agency that is more 
compatible with American federalism?
    Dr. Michel. Sir, I think it was an effort to centralize 
more power here. I don't recall--although I may have missed 
one--I don't recall ever seeing such a case with a conflict of 
interest that was brought to light.
    And the advantages are many, in the sense that you have a 
large, diverse set of opinions. If anything, on the down side 
of decentralizing things, you might get smaller mistakes and 
not larger mistakes, which would be a good thing. I think it is 
much more in the spirit of the federalism-type system that was 
put in place.
    Chairman Barr. And I would just add in my remaining time 
that shareholders of other corporations have proxy rights, and 
they have a right to have a say in the corporate governance. 
And I think that analogue would serve the Federal Reserve well, 
as well.
    With that, my time has expired, and I would recognize the 
Ranking Member for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman.
    You know, I always really, really enjoy being a Member of 
Congress, because every meeting is a master class, with a 
distinguished panel like this.
    And I am particularly appreciative of the master class we 
got from you, Dr. Pollock, on the functions and priorities and 
privileges of Article I of the Constitution. We will call you 
back so that you can repeat to our colleagues and perhaps even 
people over there on the other side of Pennsylvania Avenue, if 
they decide ``we are going to build a wall, no matter what,'' 
that it is within the purview of Congress to decide those 
things.
    But for those of you who are not legislators by trade, just 
let me tell you what the appropriations process would be like. 
The appropriations process comes under an open rule. And we 
would have hundreds of amendments, even people sitting on this 
side of the dais, that side of the dais--I can see it now: No 
funds shall be used from this appropriation to collect data on 
the real estate market. And how do you then make decisions on 
the economy and set market with an amendment like that that may 
pass because somebody might want to hide what the real estate 
market is doing?
    You are going to see amendments like ``no funds in this 
bill''--or ``funds in this bill shall be transferred from the 
New York Fed to the nonexistent L.A. Fed.''
    Sorry about that, Sherman.
    But you would see that amendment coming up.
    And so I am very, very concerned that, while it may be 
admirable--and I certainly agree that Article I needs to be 
more powerful--that this would wreak absolute chaos in this 
body. I can just see it now. I came up with all kinds of 
examples on this as I was listening to you, thinking about the 
hundreds of amendments that would come into line. And so I am 
offering to you a master class on what would happen if it were 
subject to the appropriations process.
    I guess I want to ask Dr. Baker to answer some questions. 
Some of these proposals do seem--or maybe for anybody on the 
panel--some of them do seem like they could be good 
adjustments. But I am very curious about the notion that 
political influence would not occur in the Fed with these 
recommendations, and particularly the one on the appropriations 
process.
    I understood, Dr. Baker, that you said maybe some sort of 
formula could be devised. But I am asking you, if you don't 
think that I am--I am concerned about the tricks that could be 
applied in the appropriations process. As you know, we don't 
pass appropriations bills on time, not since I have been here. 
Maybe that is going to happen someday.
    And so I am curious as to why the panel chooses--there are 
so many worthy proposals in here--why they choose this hill to 
die on.
    Dr. Baker. Well, I will just briefly comment, since you 
originally directed it to me.
    I completely agree with your concerns there, which is why I 
was saying some sort of formula. Obviously, Congress could 
change that formula, but presumably it wouldn't be done 
lightly. You did do that with the Consumer Financial Protection 
Bureau. I think you could do something comparable.
    And your point, in addition to what Congress might do, I 
should also point out, I don't think the world breaks up easily 
into monetary policy and nonmonetary policy. So, when I first 
saw that, I was imagining a lot of things that the Fed would be 
doing, or at least I would be doing if I were at the Fed, which 
would be monetary policy, which a lot of people could say, no, 
that is getting into regulation. The world isn't cut that way.
    Ms. Moore. That is right.
    Dr. Baker. So, if you want to appropriate for the Fed, 
obviously you have the authority to do that. But the idea that 
you are going to separate monetary and nonmonetary policy, I 
don't see any way you could--
    Ms. Moore. I don't either.
    And we have some very stable geniuses here in the Congress. 
And so I am not sure that people on the--and we have wonderful 
appropriators--that they are capable of deciding how much we 
should or should not spend on collecting data or evaluating 
certain market forces.
    There will be an amendment saying that ``no funds shall be 
used to enforce the dual mandate for unemployment.''
    And so, with that, I would gladly yield back to the 
Chairman.
    Chairman Barr. Thank you very much.
    The gentlelady yields back, and the Chair now recognizes 
the Vice Chairman of the subcommittee, Mr. Williams from Texas.
    Mr. Williams. Thank you, Mr. Chairman and Ranking Member 
Moore, and thank all of you for holding today's hearing.
    While I am excited about incoming Federal Reserve Board 
Chairman Powell, I feel that the Fed is in desperate need of 
reform. The time for that reform is now, and I am glad that 
this afternoon we will examine a series of proposals seeking to 
increase the effectiveness and accountability that the Fed has 
been lacking. For too long, the Fed has just, frankly, run 
wild, taking actions as it sees fit and concentrating its power 
inside the Beltway, and it is time to make a change.
    The proposals before us offer many solutions to very 
important problems in the Federal Reserve System. Of note is my 
proposal, the FOMC Representation Improvement Act, which will 
allow the FOMC to make more informed monetary policy decisions 
by giving representation to all 12 district bank 
representatives.
    It is like many of the proposals before us today; it is 
straightforward and common sense. I am optimistic that we will 
make headway. And I look forward to the expert testimony of all 
of you today, and I thank all of you for being here.
    So my first question is to you, Dr. Michel. Thank you for 
being here and for your informative testimony on the best ways 
to, as you put it, lessen the centralization that has developed 
in the Federal Reserve system.
    Now, many of the proposals before us are in that spirit. My 
proposal, called, as I said earlier, the FOMC Representation 
Improvement Act, would give every district bank representative 
a vote in the FOMC. So do you feel that this policy will lessen 
the centralization in the Federal Reserve system?
    Dr. Baker. Oh, absolutely. Yes.
    Mr. Williams. OK.
    Second, I would like to ask you also about the proposal to 
restore Class A director voting rights in the selection of 
district banks presidents.
    I agree with your testimony that section 1107 of Dodd-
Frank, which took voting rights away from Class A directors, 
served only to increase the board's political influence over 
district banks. And since the change was made, unconventional 
candidates, as we all know, have been chosen to succeed their 
conventional predecessors.
    So what is the danger in section 1107 of Dodd-Frank if 
Congress does not successfully restore voting rights to Class A 
directors in the district bank president selection process? 
And, second, will this proposal successfully restore the former 
balance?
    Dr. Michel. Sir, I do think 1107 actually was a solution in 
search of a problem. And, yes, I do think restoring it is the 
right way to go.
    I do think that some of the--without naming names, I think 
the goal should be to have people who understand their 
districts, understand banking in their districts, understand 
monetary policy in their districts, in those district bank 
roles. And I think this is probably the best way to go about 
restoring that, as opposed to getting some presidents that we 
got recently for more political reasons, which is inevitably 
what happens when somebody in Washington picks those people.
    Mr. Williams. We have seen it, haven't we? Thank you.
    Mr. Pollock, in your testimony, you spent some time 
discussing the checks and balances necessary for our 
constitutional Government. No part of the Government should be 
exempt from oversight, the Fed included.
    Oftentimes, the Fed performs actions outside of its defined 
role of monetary policy, unaccountable to anyone. This needs to 
be changed. And by exercising the power of the purse and 
putting the nonmonetary policy functions of the Fed on 
appropriations, Congress can begin to rein in this out-of-
control entity.
    So, in your estimation, is the proposal a step far enough 
in the right direction to begin to make the Fed more 
accountable to Congress?
    Mr. Pollock. Congressman, in my opinion, it is a definite 
step in the right direction, but more accountability would be 
desirable. And this committee has, in other contexts, discussed 
additional substantive accountability of the Federal Reserve 
with respect to its monetary and financial operations. I think 
that is a good idea.
    As I have pointed out in my testimony, in the 1970's the 
Democratic Party worked very hard to try to make the Fed more 
accountable to Congress. They were right. But we need to do it 
more effectively.
    Mr. Williams. One more question to you Mr. Pollock in my 
remaining time. When dealing with the uncertainty of the 
economic and financial future, you also stated in your 
testimony that the promotion of intellectual diversification 
within the organization is important.
    One of the proposals before us provides for at least two 
staff members to advise each member of the Board of Governors, 
independent of the Chairman's influence. It seems to me that 
the Fed Governors ought to have access to unbiased advice if 
they are to make proper, sound decisions.
    So do you feel that the board has at times fallen prey to 
what I would call groupthink? And would this proposal help to 
promote the intellectual diversification that you feel is so 
important in dealing with uncertainty?
    Mr. Pollock. I think it definitely would. And I think a 
problem recognized by people who are Governors, other than the 
Chairman, is this fact that the staff always devotes itself to 
the Chairman and the dominant agenda. And this would be a very 
good proposal, as I said in my written testimony.
    Mr. Williams. Thank you for testifying.
    And I yield back.
    Chairman Barr. The gentleman's time has expired.
    The Chair recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. Democracy is under attack. The battleground is 
this room. And it is under attack from both the left and right. 
The left wants to make sure that we empower entrenched 
bureaucracies and protect them from public input. The right 
says, let's democratize by giving more power to banks. And we 
need regional control; we need control outside of Washington. 
We need to make bank presidents control their regulation 
process and monetary policy. Democracy may prevail, but it 
doesn't look like it.
    We are told that we don't want to politicize things. That 
is because the enemies of democracy don't dare claim that they 
are against democracy. They just say they are against politics. 
But politics is the only mechanism by which the voters of the 
country can influence or control public policy. So you are not 
against democracy as long as the people who are elected do not 
control Governmental policy. I suggest that the enemies of 
democracy ought to have the guts to come out and say they are 
against democracy instead of using the word 
``politicalization.''
    And as for the idea that we need local input, I couldn't 
agree more. Let's have a Class D vote that has 100 voters and 
have that be the 100 largest local labor union leaders. Why 
should banks control monetary policy when we are all talking 
about jobs? If we care about jobs and we want some entity other 
than Governmental officials to have input, why banks? They are 
not dedicated to jobs. Why not local labor leaders? They don't 
have to be national labor, not Washington, not the national--
local labor union leaders ought to be in control, or the public 
elected officials and the President, who is elected by the 
public, should be in control. But for God's sake, why banks?
    Now, Dr. Michel, you suggested that we have--I believe it 
was also Mr. Selgin--you suggested that we ought to have the 
FOMC rather than the Board of Governors empowered. Since that 
just empowers banks rather than the people of the country to a 
greater degree, couldn't we marry that with the idea that these 
local presidents of the Federal Reserve are selected by the 
President or selected by local assemblies of voters or selected 
by any mechanism that doesn't empower banks?
    Dr. Selgin. Yes, Congressman. Well, what I am arguing for 
and what I think the proposal is for is not giving more power 
to the FOMC than it has traditionally had--
    Mr. Sherman. Well, you are going back to an antidemocratic 
tradition which, fortunately, we have moved away from. We took 
some power away from an entity that had bank control and moved 
it to a body selected by an elected President of the United 
States. So, out of a nostalgia for an antidemocratic 
institution, you are moving back to that.
    Dr. Selgin. Well, perhaps, but the only nostalgia I am 
referring to lasted up until October 2008, so it is not all 
that nostalgic. The FOMC had the complete responsibility for 
monetary policy until that date when--
    Mr. Sherman. So, if we are going to do that, why not have 
an FOMC that is entirely reflective of a democracy? Why have 
bankers vote as opposed to people voting?
    Dr. Selgin. Well, let's understand--
    Mr. Sherman. Or labor union leaders. I am willing to go 
with that too.
    Dr. Selgin. I remind you--
    Mr. Sherman. I am looking for Republican support for that 
idea.
    Dr. Selgin. --with its existing structure, the FOMC gives 
an overwhelming advantage to the members of the appointed 
Federal Reserve Board, who have five--
    Mr. Sherman. So we will have some democracy and some bank 
control. Why don't we do that for Members of Congress? Why 
don't we say that three-quarters of the outcome is determined 
by how the voters vote and then we have a separate caucus of 
bankers and they control one-quarter of the vote? Wouldn't that 
be a good way to depoliticize?
    Mr. Pollock?
    Mr. Pollock. Congressman, my suggestion is the people who 
really are elected by the people, namely the Members of 
Congress, are the responsible party for the definition and the 
management of money. And that is the way--
    Mr. Sherman. But we can vote to move away from democracy by 
setting up a commission of labor union leaders or banks to be 
making Governmental decisions.
    Mr. Pollock. Since labor unions are private--labor only 
represent about 7 percent, if I am right, of labor, I am not 
sure--
    Mr. Sherman. Well, I am willing to create employee councils 
of other institutions, too, just as soon as I get a Republican 
cosponsor.
    I yield back.
    Mr. Pollock. And, Chairman, if I could just say, I love 
politics, and money is political.
    I think you and I agree on that one, Congressman.
    Mr. Sherman. I yield back.
    Chairman Barr. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Oklahoma, Mr. 
Lucas.
    Mr. Lucas. Thank you, Mr. Chairman, and thank you for 
holding this hearing.
    And, clearly, one of the few things that we all agree on in 
this room is that Congressional oversight of the Fed is 
important. And given the wide effect of Fed regulatory 
authority, it is important that Congress be informed when the 
Fed is considering new regulations.
    And, to that end, I will formally introduce a bill to 
require the Fed's Vice Chairman for Supervision to include 
written testimony about any current or intended regulations 
before Congress. And, furthermore, my bill will ensure that 
testimony is given even if the Vice Chair position is vacant at 
the time of the appearance.
    And I am pleased to note that, despite some differences on 
other proposals at this hearing, all of the witnesses seem to 
agree in their written testimony that my bill has merit.
    Admittedly, it is a simple concept and idea, but I still 
would like to get your thoughts on that.
    So, first, I turn to you, Mr. Pollock. I realize this is a 
straightforward idea, which raises a question as to why this 
has never been an official requirement before. In your 
testimony, you discuss the increasing power of the Fed. If my 
bill were enacted, what regulatory areas under the Fed's 
purview would be the most likely to show up in this new 
testimony, in your mind?
    Mr. Pollock. Thank you, Congressman.
    I think it is an important proposal and a good one. And the 
Fed has become, as I said in the testimony, a hugely powerful 
regulator. If you look at the history of the Federal Reserve, 
you find what I call Shull's paradox, after a great historian 
of the Fed, which is: The more the Fed screws up in each cycle, 
the more power it gets in the subsequent political development. 
And this proposal would address that.
    I would guess that you would have to get a lot of reporting 
on the so-called systemic risk activities of the Federal 
Reserve, which is where, under Dodd-Frank, they had the biggest 
expansion of their power. And by being able to run the stress 
tests to test systemic risk, they can really, without 
limitation, put anything into those stress tests that they want 
and make it up as they go. I think the Congress would want to 
hear about just how that works and about the systemic risk 
ideas in general.
    Mr. Lucas. Dr. Michel, I would ask you the same question 
but would also be curious how, if at all, previous Fed 
rulemakings would have been different if there were a 
requirement to provide testimony to Congress. Any thoughts, 
intuitions?
    Dr. Michel. Well, I think more public scrutiny is always 
better than less. And if the Fed is going to be involved in 
regulating and there is a vice chair in charge of supervision, 
yet that position is vacant and they are still regulating, then 
somebody should come up here and describe what is going on, 
what is coming down the pike, and so forth. So, yes, I 
definitely think that would be an important improvement.
    I would really quickly throw out, though, that, first of 
all--well, everybody has left--but I have never said the Fed is 
not political. And I think that is the opposite; I think it is 
incredibly political. It is certainly not independent from 
politics. And one of the reasons is because it is regulating.
    And, in fact, it shouldn't be regulating. It should not be. 
We don't need more than one Federal regulator. I know that 
nobody wants to go that far right now, but we already have more 
than one Federal banking regulator. We don't need the Fed doing 
it, especially not since they have control over the money 
spigot.
    Mr. Lucas. Thank you, Doctor.
    With that, I yield back, Mr. Chairman. Thank you.
    Chairman Barr. The gentleman yields back.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman.
    Thank each of you for joining us today and for your 
continued support to this committee.
    Mr. Pollock, I would like to ask you a couple questions. 
You have served as a chief executive for a large organization, 
someone who is more familiar than most with how these leaders 
are nominated and appointed. Does it make sense for an 
organization to completely silence its shareholders while 
hiring its chief executive?
    Mr. Pollock. Congressman, I don't think it does. As I look 
at the problem of electing the chief executive, you have to 
ask, what is the nature of a board of directors? And the board 
as a whole, in my judgment, should be doing that. Because all 
directors, even when you have special rules where some 
directors are elected in some ways and others appointed, all 
directors have exactly the same fiduciary responsibility to the 
organization. And one of those, one of the most important 
fiduciary responsibilities, is selecting the best chief 
executive you can.
    Mr. Pittenger. Yes, sir. Thank you.
    To that end, would you just help clarify the role of the 
Class A director of the Federal Reserve banks and the role that 
they play, essentially?
    Mr. Pollock. In my judgment, the role of a Class A director 
is exactly the same as the role of any other director. All 
directors on any board are equally and severally and jointly 
responsible for doing what is in the best interest of the 
institution and its mission. And to divide boards into various 
constituency representatives is a way to destroy the 
functioning of the board.
    Mr. Pittenger. Yes, sir. I concur.
    As you would understand, the Federal Reserve's first 
mandate is, of course, to stabilize prices. Is there a stronger 
alignment of incentives in giving voice to people who make 
fixed-rate loans?
    Mr. Pollock. I think that if you are in the business of 
making fixed-rate loans or dealing with money in any sense, 
obviously, you have a strong interest in the monetary unit and 
its integrity. And that is appropriately and rightly 
represented in the deliberations of both the banks and should 
be in the board.
    Mr. Pittenger. Just to confirm our thinking, if you were to 
buy stock in a company, would you be able to vote for the chief 
executive of your company?
    Mr. Pollock. No. You would vote for the directors, and the 
directors would choose the chief executive.
    Mr. Pittenger. Thank you very much.
    One last question for you. Should Class A directors have 
all of the rights and responsibilities of Class B and C 
directors?
    Mr. Pollock. To repeat myself a little bit, Congressman, I 
think all directors do have and should have the same 
responsibilities and, more importantly, the same duties.
    Mr. Pittenger. I appreciate the clarification on that.
    Mr. Michel, can Class A directors vote for their chief 
executive, or did Dodd-Frank silence them as owners of their 
respective district banks?
    Dr. Michel. So section 1107 of Dodd-Frank removed that 
ability and slanted it toward, in my opinion, being handpicked 
from D.C. The district president would be handpicked from 
somebody on or connected to the board.
    Mr. Pittenger. Thank you.
    As you know, the CHOICE Act and also the Senate's Economic 
Growth, Regulatory Relief, and Consumer Protection Act contains 
a regulatory off ramp. While the Senate bill's regulatory off 
ramp is much more limited than the CHOICE Act, it is clear that 
both the House and Senate see merit in this reform.
    Do you think that an original capital election or a 
regulatory off ramp is a positive reform that will reduce 
firms' probability of failure in any consequent taxpayer 
bailout?
    Dr. Michel. Oh, yes, absolutely. So I am very glad that 
they are in both bills. It wasn't advertised that way in the 
Senate bill, but it is an off ramp. And, in principle, it is 
really not that different from the one in CHOICE in terms of 
how it is actually put in place and who it applies to, although 
the CHOICE Act one, as you know, is broader.
    The idea is very sound. A higher equity ratio means that 
the bank is going to be able to absorb more of its own losses, 
therefore lowering the probability of failure and the need for 
a bailout. So this is definitely a positive direction.
    Mr. Pittenger. Thank you.
    Mr. Pollock, do you want to comment on that? You are 
nodding your head.
    Mr. Pollock. I sat at this very table and testified in 
favor of the CHOICE Act and the off ramp, and I continue that 
support.
    Mr. Pittenger. I appreciate your support.
    Thank you. I yield back.
    Chairman Barr. The gentleman yields back.
    The Chair now recognizes the gentleman from Ohio, Mr. 
Davidson.
    Mr. Davidson. Thank you, Chairman.
    And I thank our witnesses. I really appreciate your 
expertise in this matter.
    And as we talked earlier, we have several ideas under 
consideration, and one is to put nonmonetary policy functions 
of the Fed on budget. The Federal Reserve is, of course, 
accountable to Congress, and that really needs to mean more 
than coming and answering a few questions once a year.
    And, Mr. Michel, if you could address some of the concerns 
I am just going to share.
    Chris Dodd, Senator Chris Dodd, of Dodd-Frank fame, one of 
the primary architects, acknowledged prior to the law's passage 
that, in light of the Fed's dismal performance before and 
during the financial crisis, that granting it more regulatory 
authority was, quote, ``like a parent giving his son a bigger, 
faster car right after he crashed the family station wagon.'' 
So he recognized that, but of course he blew right through his 
own advice and gave the Fed even more authority as a regulator.
    I am particularly concerned with actions of the Fed as 
regulators, and I will share a story. Prior to even thinking I 
would be a Member of Congress, I was a business guy. And I had 
a banker come talk to me and say, ``You have been growing at 
20-plus percent in these manufacturing companies, maybe you 
should just grow at 5 percent and play more golf.'' I said, 
``Is that really what you want to do?'' He said, ``No, I want 
to loan you more money.'' ``Well, why would you say that?'' 
Well, because they wanted to treat, under Basel III standards, 
the line of credit as if it were fully utilized, when we were 
using only about a third. Well, of course that weakens the 
balance sheet.
    These kinds of things have had an incredible impact on the 
growth rate in our entire macro economy. And so you would 
think, is there a law that was passed? Is this part of Dodd-
Frank? No. This is simply the Fed acting as a regulator.
    Rulemaking, which we have oversight and review of in other 
regulatory agencies. The Congressional Review Act lets us 
rescind bad policy. But the Fed is somewhat immune to any of 
our suggestions.
    So could you address some of those concerns, sir?
    Dr. Michel. Sure. I mean, these are many of the types of 
concerns that I have been writing about, though I didn't ever 
have as good of an example as that one. That is amazing.
    For years, the idea that Congress should just delegate to 
the Fed, go ahead and take care of all this stuff, and somehow 
that was democratic and somehow that the Fed is accountable for 
what they are doing is insane.
    They have gone much farther than they should have, and that 
is just my opinion, but this needs to be reined in in a way 
that there is less discretion and that they are focused on 
monetary policy and that no other regulator should have as much 
discretion to be able to do something like what happened to 
you.
    And I have to say, again, the notion that somehow they are 
not politicized and that politics doesn't come into play here 
and that these decisions to take on these international 
agreements isn't political, that is absurd.
    Mr. Davidson. Thanks.
    And, Mr. Pollock, maybe you could comment on how the 
Federal Reserve blends this sense of credibility as a monetary 
policy--of course we have to have an independent monetary 
policy--to blur the lines and say, but--acting as a regulator 
here. Could you comment on that?
    Mr. Pollock. Thank you, Congressman.
    In my view, the Fed should be independent neither as 
regulator nor as monetary manipulator or manipulator of credit 
allocation and asset prices.
    I also would go further, perhaps, than the proposal as far 
as appropriations go. I don't see any reason we shouldn't 
appropriate all of the Fed's expenses, not just the nonmonetary 
ones, because every dollar, as I said in my testimony, the Fed 
spends is, in fact, a taxpayer dollar.
    Mr. Davidson. Yes. I appreciate that. And so that shows 
this is a more modest proposal. There would be some support for 
a stronger position. And this is hopefully something that can 
reach some bipartisan support. I was encouraged to hear Mr. 
Sherman, in his opening remarks, talk about some concern for 
the lack of accountability for Federal agencies to this body.
    I guess in my last few seconds here I would like to just 
throw out there one of the concerns highlighted by the 
rulemaking activity on short-term credit. The other thing is, 
in their conduct of monetary policy, the Fed has been swapping 
short-term money for long-term money. And what has been the 
effect of that on the growth rate of our economy, in your 
assessment?
    Mr. Pollock. Congressman, if I could try on that one, the 
clear effect has been that, de facto, it has radically 
shortened the maturity structure of the debt of the United 
States and made the expenses of the debt going forward very 
vulnerable to higher short-term interest rates.
    Mr. Davidson. Thank you.
    My time has expired, and I yield.
    Chairman Barr. The gentleman's time has expired.
    The Chair recognizes the gentlelady from New York, Ms. 
Tenney.
    Ms. Tenney. Thank you, Chairman Barr.
    And thank you to the panel for a really great discussion. I 
am also a small-business owner. I am going to talk about a 
couple other things, but I loved the conversation about we keep 
talking about democracy, but when you have centralized power, 
how can you have democracy? I keep thinking of Milton Friedman 
somehow.
    But, anyway, I really wanted to talk about a couple pieces 
of legislation that I have that deal with the Federal Open 
Market Committee and the blackout period, which Mr. Michel 
referenced. And there seems to be some ambiguity between the 
Congressional Members about the Federal Open Market Committee 
and about monetary policy. And the current structure of the 
blackouts results in the Federal Reserve's staff and employees 
don't have access to Congressional briefings--or we don't have 
access--they are denying congressional briefings to us during 
these blackout periods.
    And my legislation aims to codify the policy but also 
explicitly provides that it does not apply to the Fed's 
supervisory and regulatory powers, and to give us an 
opportunity to know what is going on with the Fed.
    And I just wanted to--I know, Mr. Michel, you mentioned 
this in your comments initially, but do you believe that the 
legitimate Congressional accountability is compromised when Fed 
officials and staff refuse inquiries about supervisory and 
regulatory matters by invoking the blackout period surrounded 
by the Federal Open Market Committee? If you could just give me 
a quick explanation.
    Dr. Michel. Yes. And it becomes a fig leaf of sorts that 
they can hide behind for no real reason to stall--at the very 
least, stall from giving Congress answers to questions that 
they deserve the answers to.
    Ms. Tenney. Right, so less transparency. So you would 
support us requiring them to give an opportunity to speak 
instead of hiding behind these blackout periods?
    Dr. Michel. Yes.
    Ms. Tenney. Thank you.
    Just to switch gears for a second, I want to talk about the 
ability of the Federal Open Market Committee's role in the 
interest on excess reserves.
    Back in 2006, Congress passed the Financial Services 
Regulatory Relief Act, which authorized the Federal Reserve to 
pay interest on excess reserves at reserve banks. I know we had 
a little bit of discussion on this already. However, when the 
bill was amended, it allowed the Board of Governors, not the 
entire Federal Open Market Committee, to set the rates. The 
interest rate paid on reserves is set by the board and now 
serves as an additional instrument for conducting monetary 
policy. So the theory goes.
    Let me ask--and I think I would just want to jump down and 
talk to Mr. Selgin. Would you be supportive of legislation to 
shift the responsibility to set interest rates on reserves from 
the Board of Governors to the FOMC so that the district bank 
presidents who are voting members of the FOMC would be able to 
participate in a process that has now become a central tool of 
this monetary policy that we have referenced today?
    Dr. Selgin. I would indeed, Congresswoman. I believe that 
the decision to place monetary policy decisionmaking with the 
FOMC, which was a decision that prevailed until recently, 
represented, itself, a very reasonable compromise between 
placing all power in the hands of the appointed board members 
and placing power in the hands only of the district banks, 
which is where it used to be before 1935.
    So we had a nice compromise, a compromise that actually 
weighs in favor of the board. And now, inadvertently, the law 
has taken the compromise and undone it, giving all the power to 
the board. And this was inadvertent. Congress didn't intend 
this to happen. And I don't understand why Congress would allow 
it to continue this way, even though they didn't design it or 
intend it to happen in the first place.
    Ms. Tenney. Yes. And to reference Mr. Pollock saying, let's 
go back to having Congress exercise its full Article I, Section 
8 powers over the Fed--so you agree that the full mix of having 
the FOMC, meaning including Board of Governors and regional 
banks, would be the better way to determine what the reserve 
rates are?
    Dr. Selgin. I do.
    Right now, suppose that the FOMC as a whole voted for a 2-
percent upper bound to the target rate but the board favored a 
2.5--that is, the board members favored a 2.5 percent rate. 
Legally, the FOMC would have no power to prevail over the board 
in this case. Now, the board might listen to the Fed 
presidents, but it doesn't have to by law.
    This is a very undesirable situation because it is 
unintentional and it undoes a compromise that was reached 
legally and understood by everyone to be reasonable in a manner 
that no one discussed or approved of or debated. And this is 
not how laws and how the Fed should be reformed. It should be 
reformed in this room deliberately, not as a matter of 
inadvertent developments outside of Congress.
    Ms. Tenney. Thank you very much.
    My time has expired. Thank you.
    Chairman Barr. The gentlelady's time has expired.
    The Chair recognizes the gentleman from Indiana, Mr. 
Hollingsworth.
    Mr. Hollingsworth. Well, good afternoon. I appreciate all 
of the witnesses being here.
    And certainly much has been talked about with regard to 
accountability, all of which I agree with. That is the 
direction we need to move in, accountability to the people and, 
as Mr. Pollock said, perhaps not to the executive. There is a 
long, sordid past of central banks being accountable to 
executives that ends poorly.
    But one other thing I wanted to talk about was a little bit 
about the underlying economics. And I know Dr. Selgin on 
several occasions has remarked about some of the grave 
deleterious effects of totally supplanting open market 
operations with IOER and IOR.
    And I wondered if you might review a little bit of that 
with us, not the accountability and decisionmaking but just the 
underlying policy itself and some grave concerns surrounding 
that.
    Dr. Selgin. Yes. Thank you, Congressman, for the 
opportunity.
    It is very odd that we got to this situation where interest 
on excess reserves has become our monetary policy tool. I want 
to remind the committee that, when the Fed implemented interest 
on excess reserves in October 2008, it was concerned that there 
might be too much inflation in the economy and wanted to make 
sure monetary policy wasn't too loose. Interest on excess 
reserves was designed to get banks to hoard all the fresh 
reserves the Fed was creating. And, in retrospect, it is pretty 
clear it contributed to the collapse of the economy that took 
place in the months after its implementation.
    Yet, despite that collapse, the Fed decided to keep that 
mechanism, that instrument in place so that, even after it 
created several trillion dollars of fresh reserves through its 
quantitative easing, those reserves also piled up, as might 
have been expected, and the stimulus effect was less than it 
should have been.
    Since then, the Fed has consistently failed, as has been 
mentioned, to reach its 2-percent inflation target. Well, don't 
you know? Maybe that has something to do with the fact that, no 
matter how many reserves banks get, they tend to just sit on 
them, or at least the bigger banks in New York and many foreign 
ones are sitting on them, where they cannot be serving the 
needs of the American economy, let alone contributing to an 
increased inflation rate.
    Mr. Hollingsworth. Right.
    And for the dozens of Americans watching this and keeping 
score at home, I think the summary is that, otherwise, these 
banks would be lending out to consumers, out to businesses, who 
could productively invest that capital, use that capital to 
grow the economy. Those reserves and excess reserves are now 
sitting at the Federal Reserve not creating economic growth. 
And that output gap that we have seen be very large over the 
last decade has ensued, leaving many of my constituents back 
home wondering about their financial future and their 
business's financial future.
    Dr. Selgin. Indeed.
    If I may add to that, before the crisis--before interest on 
reserves, rather, banks lent approximately all of their 
reserves. That is, they held no excess reserves. So loans were 
about equal to 100 percent of the bank's assets, almost. After 
interest on reserves, excess reserves became 20 percent of 
bank's assets--
    Mr. Hollingsworth. Right.
    Dr. Selgin. --and loans became 80 percent.
    Mr. Hollingsworth. Right. I think many of my constituents 
would be shocked to learn, reading in the papers over and over 
again throughout the crisis and afterwards there is no loan 
growth and people aren't taking out loans, that we are here 
encouraging banks not to make loans by paying above-market 
interest rates on excess reserves parked at the Federal 
Reserve. And I think that they would be astonished to discover 
that.
    I wanted to transition a little bit to a topic and maybe go 
back to the 30,000-foot level and talk overview. And I was 
going to ask you this, Dr. Michel.
    The U.S. banking system has been especially prone to crises 
and volatility over the last 100 years, maybe even compared to 
our developed-world counterparts. And I was curious if you 
could talk a little bit about what your view is on how the 
Federal Reserve may or may not have contributed to some of that 
volatility over time in, as you said earlier, some of the 
politicization of decisions but also just some of the policies 
that they put in place maybe without some forethought as to how 
those might have impacts on the real economy.
    Dr. Michel. Sure. It has contributed to a lot of 
volatility. It has a really great track record if you look at 
only the so-called great moderation and if you ignore 
everything else.
    Mr. Hollingsworth. Right.
    Dr. Michel. But, on the whole, the United States banking 
system has been the most volatile of pretty much any developed 
nation.
    Mr. Hollingsworth. Right.
    Dr. Michel. And the Fed has contributed to that mightily. 
I, personally, don't throw out the Great Depression. That was a 
pretty big one. That was a pretty big mistake.
    Mr. Hollingsworth. Right.
    Dr. Michel. And, ironically, they made almost exactly the 
same mistake in the last crisis by having the money supply 
tightened up too much at exactly the wrong time.
    Mr. Hollingsworth. Right.
    Sorry, I am running out of time. The last thing I wanted to 
ask you about was real GDP targeting. I know that you and I 
have talked about this on several occasions, but I know the 
Federal Reserve's first mandate, to maintain stable prices, has 
been talked about, that 2-percent growth in prices may or may 
not be stable.
    Do you have a view on real GDP targeting versus what we are 
currently doing with the first mandate?
    Dr. Michel. Yes, I think that would be a much better 
approach than either the dual mandate that we have or even just 
a single price stability target. It is more flexible, it is 
easier to implement in terms of the information that you need, 
and it is more forgiving.
    Mr. Hollingsworth. Right. I appreciate that.
    I yield back.
    Chairman Barr. The gentleman's time has expired.
    The Chair recognizes the gentleman from Minnesota, Mr. 
Emmer.
    Mr. Emmer. Thank you, Mr. Chair.
    Thanks to the panel for being here.
    Very quickly, according to The Wall Street Journal, Lloyd 
Blankfein, Goldman Sachs' CEO, appears to see the considerable 
increase in bank regulation as a competitive advantage, 
observing that, quote, ``more intense regulatory and technology 
requirements have raised the barriers to entry higher than at 
any other time in modern history. This is an expensive business 
to be in if you don't have the market to share in scale,'' 
close quote.
    Mr. Pollock, we are all familiar with the term ``too big to 
fail.'' Did Mr. Blankfein's comments suggest that recent 
financial regulations are encouraging banks to become too big?
    Mr. Pollock. Congressman, I don't think there is any doubt 
about the fact that intense, complex, burdensome, expensive 
regulation favors big banks or big organizations of any kind 
versus small ones, because big organizations have the scale to 
build internal bureaucracies to set against the Government 
bureaucracies and little ones don't. So it is a tipping of the 
competitive advantage toward big organizations.
    Could I make one comment--
    Mr. Emmer. Please.
    Mr. Pollock. --just to my colleague Mr.--your friend--
    Mr. Emmer. Dr. Michel.
    Mr. Pollock. --Dr. Michel. And that is, he gave the Fed 
credit for the ``great moderation,'' which was really the great 
over-leveraging leading to the disaster.
    Dr. Michel. For the record, I just said they had a good 
reputation. I didn't say it was--
    Mr. Pollock. Fair enough.
    Mr. Emmer. So, that aside, if you go back to 2008, there 
were roughly a little over 8,000 community banks in this 
country, the mainstream banks that are basically the backbone 
of our small communities all across this country. And I know in 
our great State of Minnesota they are incredibly important to 
small-business creation, to entrepreneurs that have an idea and 
they are starting a business in their garage. And we have all 
kinds of examples; Medtronic is one that comes to mind in 
Minnesota.
    Those banks--and I guess, Dr. Michel, since you were called 
out, did those banks cause--those community banks, did they 
cause the crash in 2008?
    Dr. Michel. No, they didn't. And they are being punished 
for things that they didn't do with more regulation. And that 
is nothing new. This is a very long-term trend, as I am sure 
you are aware of. This has been going on for decades, in terms 
of more regulation being hoisted on the banks, creating the 
incentive to get larger. And the flip side of that, of course, 
is that you are too small to succeed if you don't grow--
    Mr. Emmer. Well--
    Dr. Michel. --or merge.
    Mr. Emmer. And if I can interrupt, because this is a great 
discussion. We never have enough time.
    We seem to have some folks at the Fed who think the reason 
that we are losing these small banks--and you need every 
financial institution in the financial services food chain. And 
we seem to be sucking all the small ones up into the bigger 
ones, and creating this inverse pyramid that actually could set 
us up for a bigger problem in the future. But they will say to 
you things like, ``Well, it is technology. The smaller banks 
can't keep up because of the technology.''
    I know it is more complicated than this, but isn't it a 
combination--and it involves the Fed, which we are trying to 
solve some problems, hopefully, in this Congress. Isn't it a 
bigger problem that every time there has been a problem with 
the financial system in this country, good-meaning people come 
in and give all kinds of new authority, maybe, or they look the 
other way and the Fed takes more authority, or other agencies, 
and they try to solve the problem but they squeeze down even 
harder on these smaller institutions that can't play? And then 
you have them keeping interest rates at zero for how many years 
so nobody can even make any money in the business.
    I mean, isn't that the real problem for why you are killing 
the lower end of the financial services food chain in this 
country?
    Dr. Michel. It is certainly accurate that they have been 
squeezed more for every problem that comes up. If you look at 
Basel, that is great example. The Basel requirements were 
forced on all banks. That is ridiculous. They were never meant 
to apply to any bank that is not internationally active.
    Mr. Emmer. The First Bank of Hallock, for instance, doesn't 
really care what is going on overseas, right?
    Dr. Michel. Right.
    After the S&L crisis, from corrective action, things were 
changed again. Smaller banks got the brunt of that. And, 
frankly, the FDIC resolution process adds to the concentration 
as well.
    Mr. Emmer. I am going to stick with you. I am sorry. We 
have something going. So I want to just--with the couple of 
seconds left--well, no, it is--the question I have for you, 
since Mr. Pollock called you out, the question I have for you 
is: In a democracy, in a society that is supposed to be a 
Government by the people, why wouldn't we want an institution 
like the Fed to be more transparent and more accountable?
    Dr. Michel. I think we do want it to be more transparent 
and more accountable. I think that is exactly the way we should 
go. There should be no secrets there. This isn't dropping bombs 
on people. This is the economy. This is monetary policy, 
regulation. Everything should be out in the open.
    Mr. Emmer. Thank you. And yet I think it has that effect on 
some people.
    Thank you, Mr. Chairman.
    Chairman Barr. The gentleman's time has expired.
    The Chair now recognizes the gentleman from West Virginia, 
Mr. Mooney.
    Mr. Mooney. Thank you, Mr. Chairman.
    So, in the discussion drafts today, I have a bill that 
regards transparency. I am a big believer in a voters' 
Government, knowing what Government is doing at all times. So 
my bill requires the Fed to post on a public website the annual 
salary and benefits of any employees whose salary exceeds that 
of a GS-15 Federal employee.
    We also, in my bill, provide for at least two staff 
positions to advise each member of the Board of Governors. And 
so they answer to that Board of Governors member, hired by and 
answer to them, not the overall board but just to that Board of 
Governors member, and to be able to provide advice to that 
Governor independent of the Chairman's influence. Regardless of 
who the Chairman is or which politicians are in charge, we want 
these Governors to have independent analysis available to them. 
And we also subject the Fed employees to the same ethical 
standards as Securities and Exchange Commission employees.
    So my question, to no one in particular, whoever feels most 
ready to comment on it: Do you believe that the members of the 
Board of Governors can actually participate in honest and 
thorough deliberation and provide critical feedback to rules 
from staff, the Chair, and the Vice Chair for Supervision, if 
they do not have their own economic and legal advisors in each 
Governor's office?
    Sure, Mr. Pollock.
    Mr. Pollock. I strongly support that proposal, Congressman, 
to give that staff for diversification of the thinking and the 
deliberations of the Federal Reserve. I also support the other 
provisions in your bill.
    Mr. Mooney. Thank you.
    Dr. Baker?
    Dr. Baker. I would just very quickly say, I would say I 
would support the proposal with a couple reservations.
    One is I think you may want to go somewhat higher up in 
terms of who has to make full disclosures, because the salaries 
do seem relatively low for a senior economist in Washington, 
D.C.
    The other point is, as much as I do agree, I think it is a 
good idea to have two dedicated staff from my casual 
conversations with Governors over the years, they didn't feel 
that they lacked access. Now, that could just be who I happened 
to talk to, but they didn't feel they lacked access to Fed 
staff.
    Mr. Mooney. OK.
    Dr. Selgin. I had the opposite impression from various Fed 
bank presidents who I have spoken to over the years, that they 
could use some--
    Mr. Mooney. Additional staff? OK.
    Dr. Selgin. --extra staff for purposes of participating in 
the FOMC deliberations.
    Mr. Mooney. Thank you.
    I do have another on a totally separate topic, and it is 
actually for you, Dr. Selgin, so if you could keep your mic on 
there. In your testimony, you mentioned the level of interest 
being paid on reserves. And so it is actually a three-part 
question. Let me ask the whole thing, and I will yield to you.
    Is the level of interest being paid on reserves unlawful? 
That is, given the interest on both required and excess 
reserves stands above the Fed fund rates and overnight repo 
rates, isn't interest being paid on reserves above the general 
level of short-term interest rates? And if interest on reserves 
is above the general level of short-term rates, then doesn't it 
violate the 2006 authorizing legislation?
    I yield to you.
    Dr. Selgin. So those are excellent questions. And I think 
that the answer is, if it ain't illegal, it ought to be. And 
the reason I am putting it that way is that, under the statute, 
the Fed has the right to define how the law should be carried 
out. And it has defined the general level of short-term 
interest rates to be something that could include its own 
discount or primary lending rate. And so it has gotten out of 
the letter of the spirit of the law, though it is conforming 
with what is, under current regulatory procedures, the letter 
of the law.
    I think that the problem is the law itself was too vague. 
It should specify exactly and reasonably what the ``general 
level of short-term interest rates'' means, using market short-
term rates that are truly short-term and that are appropriately 
low-risk. And, by that measure, the Fed is definitely breaking 
the law right now, if you use an appropriate market rate.
    Mr. Mooney. OK. Well, thank you.
    And I am just going to make a commentary in the last 40 
seconds that I have on another separate issue. I was very 
interested in Dr. Pollock's testimony, particularly about how 
the banks, the Treasury and the Fed Reserve banks are used to 
finance wars. You mentioned that in your testimony. I think the 
American public could learn a lot more and research that a lot 
more.
    And you mention in here wars back from the founding of our 
country, Napoleon, King William's war on the continent. You 
talk about the First World War, the Korean War. And then you 
talk about President Nixon trying to push monetary actions for 
the coming elections. I seem to recall George Herbert Walker 
Bush commenting on the Clinton election in 1992, if the rates 
hadn't changed, it would have been a different election 
outcome.
    I would love to see a separate paper just on that issue. 
Don't go off on all the--just specifically on that issue, how 
monetary policy and bank reserves are used politically for 
either wars or campaign purposes. And I would love to see that 
separately.
    I yield back, Mr. Chair.
    Chairman Barr. The gentleman yields back.
    The Chair now recognizes the gentleman from Arkansas, Mr. 
Hill.
    Mr. Hill. I thank the Chairman and the Ranking Member for 
this continued discussion on how we can make the Fed more 
accountable. And I appreciate the hard work of each member on 
their bills that we are discussing today.
    I was thinking, Mr. Pollock, that your testimony smacks of 
economic historian, that that is clearly a driving interest of 
yours. And so it made me just reflect on your knowledge of the 
Constitution. Is the Federal Reserve in the Constitution, Mr. 
Pollock?
    Mr. Pollock. Not specifically, for sure.
    Mr. Hill. And so, in 1913, the Federal Reserve Act was 
passed. Who passed that act?
    Mr. Pollock. It was passed by the Congress of the United 
States and signed by President Woodrow Wilson.
    Mr. Hill. Yes. And so then we amended it in 1935, I believe 
you said, and 1977 and 1978. Was Congress meddling in the 
independence of the Federal Reserve in 1935 and 1977 and 1978?
    Mr. Pollock. In my opinion, Congress was carrying out its 
constitutional duties to oversee the Federal Reserve.
    Mr. Hill. Yes.
    And I assume you know that the Constitution has a section 
about the judiciary, right?
    So the Judiciary Branch of the Government, is that an 
independent branch of the Federal Government?
    Mr. Pollock. Yes, Congressman, it is.
    Mr. Hill. So every year in Congress, we try to pass the 
Financial Services and General Government Appropriations Act. 
Are you aware that the Judiciary Branch of the Government is 
subject to appropriations in the Congress?
    Mr. Pollock. As, in my opinion, it should be, Congressman.
    Mr. Hill. Do you feel the Judicial Branch lacks 
independence because of that?
    Mr. Pollock. No, I do not.
    Mr. Hill. I appreciate it.
    I yield back the balance of my time.
    Chairman Barr. The gentleman yields back his time.
    And with the indulgence of the panel, I may embark on one 
additional round of questioning. And if any other Members want 
an additional round, I will be happy to recognize them as well.
    I may not take the full 5 minutes, but I do want to discuss 
the legislative proposal that is in front of us relating to 
changing the voting rights of all of the FOMC members to an 
annual basis.
    As you know, under today's anachronistic voting rotation, 
the FOMC policymaking occurs with some Federal district banks 
voting once every 3 years, others voting every year, 
specifically New York, and then two: Chicago and Cleveland, 
every other year. And that is the rotation of the district bank 
presidents. Of course, as you know, the Board of Governors are 
voting all the time.
    And the proposal before us would change that so that every 
district bank president would be voting, have full voting 
rights every year all the time, just like the Board of 
Governors, the Governors, would continue to have their voting 
rights. And so all members of the FOMC would actually be voting 
on monetary policy decisions at all times.
    Let me ask, Mr. Pollock, how did the current voting 
rotation of--and I am asking you to be a bit of a historian 
here. How did the current voting rotation of district bank 
presidents come into being? Is it possible that economic 
changes across these districts over time has made that rotation 
especially anachronistic?
    And if the current rotation is less than representative, by 
giving an outside voice to certain economies and a larger-size 
voice for other economies, why wouldn't we want to give each 
district a vote in every meeting?
    Mr. Pollock. Mr. Chairman, to begin by answering the 
question at the end, I think we should.
    The Federal Reserve Act originally in 1913 did not have an 
Open Market Committee provision in it. The Open Market 
Committee was invented by the Federal Reserve banks during the 
1920's as a committee of the banks themselves when they found 
out that they could do things in the Government bond market 
which weren't originally thought of in the act.
    In 1935, as part of the centralization of the Fed pushed by 
Marriner Eccles, because he was a powerful personality and he 
wanted to run it, they made the Federal Open Market Committee 
into statute with the voting that we have now. Of course, 
Cleveland and Chicago arguably had a much more powerful 
economic position at that point than now. And New York has its 
continued position as a financial center, but I don't think we 
really want a Washington-New York axis. A whole-country 
representation would, in my opinion, be better.
    I just want to say, when it comes to voting, if you are 
afraid that the presidents would out-vote 7 Governors, if the 
presidents voted 9 against and 3 for and all the Governors 
voted in favor, the Governors would still win 10-to-9 under the 
proposal. You would have to have 10 banks voting against, out 
of 12, to defeat a unified board. And I think if you had 10 
Federal Reserve banks opposing a proposal, you should really 
think carefully and withdraw it for more discussion in any 
case.
    Chairman Barr. Thank you for that.
    And, Dr. Selgin, I will ask you to comment on that as well. 
And, as you do, I will just bring to your attention the fact 
that--and it will probably not surprise anyone here--that 
Governors--and I will preserve their anonymity--have pushed 
back on this concept with me and others Members of Congress, 
and they have made the argument that the current system works 
pretty well the way it is and that it is a balanced system the 
way it is.
    What is your response to that line of critique?
    Dr. Selgin. Well, my response would be that some people 
have a different idea of what it means for an institution to be 
working well than others and that I think that the presumption 
that we can't improve the working of the Fed reflects a great 
deal of optimism or perhaps a great deal of complacency upon 
anyone who holds it.
    As for the current composition of the FOMC, it seems to me 
that among the more obnoxious particulars of that is the fact 
that the New York Fed has a constant representation on that 
board, whereas the other regional banks only have occasional 
representation. This truly is anachronistic. It dates back to 
the days before the 1935 act, when New York exercised a great 
superiority of influence compared to the other banks, though 
somewhat unofficially.
    The problem that many people recognize with the overarching 
influence of certain segments of the banking industry on the 
conduct of Federal Reserve policy is chiefly a problem of Wall 
Street influence. It is not a problem of influence of bankers 
in other parts of the country.
    So, if you are concerned about that, let's change this 
provision of the law dictating who is on the FOMC.
    Chairman Barr. My time has expired. Thank you for your 
answers.
    And I will now recognize the Ranking Member for an 
additional round.
    Ms. Moore. Well, Mr. Chairman, I would like to use my time 
to enter a couple more letters into the record: A letter from 
the Conference of State Bank Supervisors, which is a nationwide 
organization of banking regulators in all 50 States, American 
Samoa, D.C., Guam, Puerto Rico, and the Virgin Islands.
    They object to the portions of section 1 of the draft that 
would impose a tax on State-chartered banks. They argue that 
small banks, the smallest State-chartered community banks would 
be hit the hardest since they will be required to pay the same 
fee as larger banks.
    Also, I would like to enter into the record--
    Chairman Barr. Without objection.
    Ms. Moore. --a letter from the Center for Popular 
Democracy's Fed Up coalition. They specifically object to the 
presidents of all 12 regional reserve banks being made 
permanent members of the Federal Open Market Committee.
    And so, without objection, I would hope that you would 
enter that into the record.
    Chairman Barr. Without objection.
    Chairman Barr. The gentlelady yields back.
    The Chair now recognizes the gentleman from Ohio for 
another round.
    Mr. Davidson. Thank you all. And thanks for the opportunity 
to ask some additional questions.
    And, Dr. Michel, as I was referencing earlier, in the 
rulemaking practice of the executive branch, there is a pretty 
established protocol. And some would hope for even more 
transparency there, but there is a path where they publish a 
rule, and there is a comment period.
    Have you seen the Fed act as a regulator consistent with 
that? Is it transparent, how they make rules? Or do they take 
positions if banks, for example, have a line of questioning to 
say, hey, would this be permissible? Is it easy to get guidance 
from the Fed as a regulator?
    Dr. Michel. I have heard a lot of horror stories that it is 
not. I know that there have been a lot of conflicts in the 
past, not from just hearsay. I know there have been a lot of 
conflicts between the Federal regulators, the Fed being at the 
heart of that.
    I also know that they have gone off on their own and done a 
rulemaking on their own after doing a joint rulemaking that 
they decided they didn't like anymore. The high-quality liquid 
assets is the last one, the most recent one, that comes to 
mind.
    And on top of that you have a supervisory problem, in that 
you have--it is widely discussed in the community, banking 
community, that the Fed supervisors will come in and say 
something. There is no statute, there is no guidance. They just 
decide that you can or can't do something, and they intimate 
that you can or can't do something, and then you can't do it.
    Mr. Davidson. Right.
    So to highlight a couple practices, not that these were 
inherently Federal Reserve issues, but things that were 
creative, I will grant the prior Administration, creative, but 
things like redlining and Operation Choke Point, where, using 
the power of a regulator, they are basically saying, ``Hey, we 
are concerned about your reputation, you can't bank these 
people,'' even though they have no debt, they simply want a 
depository account, and telling banks, ``No, you have to keep 
this branch open,'' even though you lose money there, it has 
been robbed 10 times, and it is a bad investment, or you have 
to make a bad investment in order to make good ones in other 
markets.
    There is a heavy hand of regulation that has been 
established in the past. And so, when those things happen, it 
is nice for Congress to be able to step in and interject. And I 
would make a persistent plea to our colleagues or counterparts 
over in the Senate to take action on the CHOICE Act and help us 
do bigger reforms.
    And, Dr. Selgin, I guess, are there concerns that you have 
in the regulatory lane that Congress, were they able to do more 
than ask a couple questions a few times, would be able to 
provide guidance that is clearly within the lane. And as my 
colleague Mr. Hill highlighted, not only is the judiciary on 
appropriations, Congress gives them guidance on all sorts of 
things in a regular fashion.
    Dr. Selgin. I think the Congress ought to be able to ask 
the Fed about anything at any time. And I think it ought to be 
able to inform itself about the subjects of any inquiry it 
wants to undertake. I don't believe that any barriers to 
congressional inquiries concerning the Fed are appropriate. And 
I don't understand the opposition of Federal Reserve officials 
and others to improving the basis for congressional oversight. 
I understand it, rather. I understand it, but I see it as a 
foible rather than something defensible.
    Mr. Davidson. Well, in general, the regulatory approach for 
any executive agency or any autonomous agency is an executive 
action where they are implementing, and the rulemaking or 
legislating is done by this body, according to the 
Constitution.
    So, Dr. Pollock, any closing thoughts on that?
    Mr. Pollock. I do have one. Thank you very much, 
Congressman.
    In the 1960's, on the 50th anniversary of the Federal 
Reserve, a Democratic Congressman, Wright Patman, held 
extensive hearings on the Federal Reserve and the ability of 
Congress to direct it. And he extracted the following 
testimony, which I think is excellent, from the then-president 
of the New York Federal Reserve Bank, who testified: 
``Obviously, the Congress, which has set us up, has the 
authority and should review our actions at any time they want 
to in any way they want to.''
    I think that sums it up pretty well, Congressman.
    Mr. Davidson. It sounds a lot like the Congressional Review 
Act. And putting them on appropriations would be a suitable way 
to make sure we have that capability.
    Mr. Chairman, I yield.
    Chairman Barr. The gentleman yields back.
    And, with that and with the call of the votes, I would like 
to thank my colleagues for their thoughtful proposals for our 
consideration today, and I would like to thank our witnesses 
for their testimony and their reaction to these proposals.
    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 
witnesses for their response. I would ask our witnesses to 
please respond as promptly as you are able.
    Again, thank you to our witnesses for your testimony.
    This hearing is now adjourned.
    [Whereupon, at 3:50 p.m., the subcommittee was adjourned.]

                            A P P E N D I X



                            January 10, 2018


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