[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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[all]