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LEGISLATION TO REFORM THE 

FEDERAL RESERVE ON ITS 

100–YEAR ANNIVERSARY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

JULY 10, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–89 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

STEVEN HORSFORD, Nevada 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

July 10, 2014 ..................................................................................................... 1 

Appendix: 

July 10, 2014 ..................................................................................................... 57 

WITNESSES 

THURSDAY, JULY 10, 2014 

Calabria, Mark A., Director, Financial Regulation Studies, the Cato Institute . 10 

Johnson, Simon, Ronald Kurtz Professor of Entrepreneurship, Sloan School 

of Management, Massachusetts Institute of Technology .................................. 14 

Peirce, Hester, Senior Research Fellow, the Mercatus Center, George Mason 

University ............................................................................................................. 12 

Taylor, John B., Mary and Robert Raymond Professor of Economics, Stanford 

University ............................................................................................................. 9 

APPENDIX 

Prepared statements: 

Beatty, Hon. Joyce ............................................................................................ 58 

Calabria, Mark A. ............................................................................................. 61 

Johnson, Simon ................................................................................................. 75 

Peirce, Hester .................................................................................................... 84 

Taylor, John B. ................................................................................................. 89 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Maloney, Hon. Carolyn: 

Excerpt of testimony of Federal Reserve Chairman Ben Bernanke from 

a Financial Services Committee hearing held on July 18, 2012 ............... 93 

Mulvaney, Hon. Mick: 

Letter to Representative Scott Garrett from Hon. Sheila C. Bair, dated 

June 30, 2014 ................................................................................................ 96 

Sherman, Hon. Brad: 

Executive Order 12866 of September 30, 1993 .............................................. 99 

(1) 

LEGISLATION TO REFORM THE 

FEDERAL RESERVE ON ITS 

100–YEAR ANNIVERSARY 

Thursday, July 10, 2014 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. 

Members present: Representatives Hensarling, Capito, Garrett, 

Neugebauer, McHenry, Campbell, Bachmann, Pearce, Posey, 

Fitzpatrick, Luetkemeyer, Huizenga, Duffy, Stivers, Stutzman, 

Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, Cotton, 

Rothfus, Messer; Waters, Maloney, Velazquez, Sherman, Green, 

Cleaver, Himes, Sewell, Foster, Kildee, Delaney, Beatty, Heck, and 

Horsford. 

Chairman HENSARLING. The committee will come to order. 

Without objection, the Chair is authorized to declare a recess of 

the committee at any time. 

This is a legislative hearing to examine a bill put forth by the 

vice chairman of our Monetary Policy and Trade Subcommittee, 

Mr. Huizenga, to make certain reforms to the Federal Reserve System. 

I now recognize myself for 5 minutes to give an opening statement. 

When this committee first embarked on the Federal Reserve 

Centennial Oversight Project last year, we promised a thorough review of America’s central bank. Today’s hearing is this committee’s 

11th hearing on the Federal Reserve in the 113th Congress. Certainly, our understanding of the Fed has been enriched through 

discussion and debate among our colleagues and complemented by 

the knowledge and perspective of many distinguished witnesses 

and scholars, including those who are here today. 

As the hearing schedule for the 113th Congress begins to wind 

down, I do wish to thank all of our colleagues and witnesses for 

their contribution to this project and the risk they undertook to 

provide such contribution. I say ‘‘risk’’ because I am reminded that 

Senator Nelson Aldrich, one of the legislators behind the Federal 

Reserve Act, noted that, ‘‘The study of monetary questions is one 

of the great causes of insanity.’’ Hopefully, we can avoid that fate. 

Regardless, we do expect to issue a full report on our findings from 

the Centennial Oversight Project in the fall. 

2 

Today, we consider the first piece of legislation to arise from this 

process, legislation to begin to reinvigorate the Fed with the type 

of accountability to Congress and the people that the Founders expected of all Federal agencies when they drafted the Constitution. 

I, again, say the ‘‘first’’ piece of legislation because reforming an institution as old, entrenched, important, and as powerful as the Federal Reserve will be a work in progress. But it is work we must 

not ignore. 

There are many excellent, capable public servants at the Fed 

who have served our Nation well and are currently serving our Nation well. But I believe a critical examination of the last 100 years 

of the Fed’s actions reveals a mixed bag at best. And, most recently, we have seen a radical departure from the historic norms 

of monetary policy conduct, from an unprecedented use of Section 

13(3) exigent powers to select intervention in distinct credit markets, to the facilitation of our unsustainable national debt, to a 

blurring of the lines between fiscal and monetary policy, all of 

which presents large and unwarranted risk to our economy. 

Clearly, our work must be thoughtful, it must be careful, and it 

must be deliberate, but much is at stake, so we must not ignore 

it. Thus, I fully expect the legislative effort to continue in this Congress and the next. 

A recurring theme throughout our hearings has been that monetary policy is at its best in maintaining stable, healthy economic 

growth when it follows a clear, predictable rule or path free from 

political micromanagement, as it did in the Great Moderation of 

1987 to 2002. 

Earlier in her career, Chair Yellen said at an FOMC meeting 

that following one type of rule, specifically the Taylor Rule, is 

‘‘what sensible central banks do.’’ I agree. 

Let me make one thing clear at the outset. We do not suggest 

for a moment that Congress, much less the White House or Treasury, should conduct monetary policy operations. We continue to respect the Federal Reserve’s independence in monetary policy. 

But that independence and discretion must be paired with appropriate transparency and accountability. What we require today in 

this legislation is that the Fed use a clear map of its own choosing 

to set the course for monetary policy and share that map with the 

rest of us. 

Additionally, the case for Federal Reserve independence when it 

sets monetary policy does not hold up when we consider the Fed’s 

new powers under the Dodd-Frank Act to regulate an ever-increasing share of the American economy. The Fed should not be permitted to hide its prudential regulatory actions behind its monetary policy independence cloak. 

So today, we consider a requirement, among others, that the Federal Reserve conduct cost-benefit analysis as it adopts new regulations. Even President Obama has issued two Executive Orders reaffirming the importance of thorough cost-benefit analysis by both 

Executive Branch and independent regulatory agencies. 

Today’s legislation includes a number of other additional transparency and accountability provisions which are badly needed for 

the Federal Reserve. It is clearly time to hold the Fed to the same 

3 

openness and transparency that we demand of other Federal agencies. 

In closing, two final points. 

First, I want to thank Chairman Campbell and his subcommittee 

for all the great work they have done and will continue to do on 

the Federal Reserve Centennial Oversight Project. I want to thank 

Chairman Garrett, whose ideas have formed the bulk of the bill 

that will be before us today. And I want to thank Vice Chairman 

Huizenga for his work on this bill, as well. 

Second, I want to emphasize again that I expect further pieces 

of legislation to follow. For example, we continue to examine the 

Fed’s Section 13(3) powers as modified by Dodd-Frank. Also, many 

in the public have inquired about H.R. 24, the ‘‘Audit the Fed’’ bill. 

Counterintuitively, that bill falls under the jurisdiction of the 

House Oversight Committee, not our own. And we look forward to 

Chairman Issa bringing that bill to the Floor. 

And I would note that today’s bill contains a provision requiring 

the GAO to ensure that the Fed complies with our statute by auditing the monetary rule they submit to Congress and, thus, complements the ‘‘Audit the Fed’’ bill. 

Again, our goal today is to begin the process of developing legislation that will ultimately strengthen the Federal Reserve in fulfilling its mission to maintain stable prices and job growth and ensure that the Fed’s rulemaking process is transparent and predictable. 

I appreciate our panel today for coming to the hearing. 

I now yield 5 minutes to the ranking member. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Today, under the guise of reform, my colleagues on the other side 

of the aisle have put forth legislation that will cripple the Federal 

Reserve’s ability to promote growth, stabilize the economy, and, in 

times of extraordinary crisis, take decisive action to avoid an economic collapse. 

This legislation is a concession to the opponents of the DoddFrank Wall Street Reform Act by making the Fed’s rulemaking 

more tedious, more expensive, and subject to endless legal challenges by those who do not agree with its decisions. 

Unfortunately, this proposal follows a Republican roadmap we 

have seen too often on this committee: First, find a regulator 

charged with withholding Wall Street accountable or routing out 

the risky behavior that led to the worst economic crisis in 80 years. 

Next, claim that regulator lacks transparency or accountability 

and, therefore, must be reformed. Finally, push legislation purported to address these issues through unnecessary obstacles like 

cost-benefit analyses, new rules, and GAO audits, all of which are 

carefully designed to gut the agency’s ability to do its job. 

We have seen this play out with legislation impacting the Consumer Financial Protection Bureau, the Securities and Exchange 

Commission, and the Commodity Futures Trading Commission— 

cops on the beat that protect average Americans and our economy 

from bad actors in the financial system. 

Today, Republicans take aim at the Federal Reserve, which 

played an integral role in stabilizing the economy at a time of inVerDate Nov 24 2008 13:44 Mar 27, 2015 Jkt 091153 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\91153.TXT TERRI
4 

tense crisis and which has continued to play an essential role in 

growing our economy and promoting full employment. 

When the crisis hit, the Federal Reserve challenged conventional 

thinking on the limits of monetary policy and appropriately took 

quick and decisive action that kept our Nation from slipping into 

a depression. But the legislation we consider today seeks to prevent 

the Federal Reserve from taking such innovative action in the future, creating rules that would prescribe monetary policy based on 

a rigid set of circumstances and factors, ignoring the best judgment 

of experts. 

Mr. Chairman, the Fed’s Federal Open Market Committee 

(FOMC) contains many of the Nation’s most respected economists 

from across the Nation. Its Governors of the Board are subject to 

democratic accountability through the process of Senate confirmation, and the overwhelming majority were confirmed by the Senate 

with bipartisan support. But this legislation would discount the experience, judgment, and discretion of these experts, instead putting 

decisions related to inflation and employment on autopilot based on 

a set of abstract factors. 

If the Federal Open Market Committee did deviate from the rule, 

the legislation requires the Government Accountability Office to 

conduct a costly and time-consuming audit, one that would undermine the independence of the Fed, shake public confidence in its 

decision-making, and create unnecessary uncertainty in monetary 

policy. 

Such a process needlessly politicizes the Fed’s decision-making 

process, compromises its role as a pillar of the global financial system, and, ironically, creates more market volatility, not less. 

Recently, Donald Kohn, 40-year veteran of the Fed, formerly Vice 

Chairman and a George W. Bush appointee, expressed his concern 

with this approach, stating, ‘‘I don’t think this is a good idea. I am 

highly skeptical that adhering to a preconceived rule will be appropriate to achieving the Fed’s objectives under many circumstances.’’ 

In addition, this legislation brings back the time-honored Republican tactic of cost-benefit analysis, imposing heavy administrative 

hurdles and new litigation risk that will significantly impair the 

Fed’s ability to do its job in a timely manner. Like efforts with 

other regulators, this provision allows Wall Street to tie up the 

Fed’s rulemaking in endless litigation, draining resources and impeding its ability to guard against risk to our financial system. 

Mr. Chairman, this legislation does nothing to promote economic 

growth, create jobs, or ensure a more stable financial system. In 

fact, it enshrines a regulatory policy that lets bad actors run amok 

while regulators waste time dithering with audits and frivolous 

lawsuits. And it does so at a time when, post-Dodd-Frank, we have 

asked and need the Fed to do more than ever before. 

I thank you, and I look forward to the witnesses’ testimony. 

And I yield back the balance of my time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Michigan, Mr. Huizenga, the vice chairman of our Monetary 

Policy and Trade Subcommittee, and coauthor of the legislation before us, for 11⁄2 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

5 

And this is a special day, not just because we are talking about 

this piece of legislation, but because I get to share it with a family 

member. 

And sorry, buddy, this is what dads live for, embarrassing their 

kids. 

My oldest son, Garrett, is here with us today, and I am thrilled 

that we could have him here. 

[applause]. 

Chairman HENSARLING. Without objection, add another 10 seconds to the gentleman’s time. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

And, Garrett, don’t worry about it. There are a lot of other people 

who are going to be hanging on, trying to follow all this, as well, 

because it is very complicated. 

But I appreciate this hearing today because, over the past several years, the Federal Reserve has gained unprecedented power, 

influence, and control over the financial system while remaining 

shrouded in mystery to the American people. This standard operating procedure cannot continue. We must lift this veil of secrecy 

and ensure that the Fed is accountable to the people’s representatives. 

That is why, along with Capital Markets Subcommittee Chairman Scott Garrett and my own chairman, Chairman Campbell, I 

introduced H.R. 5018, the Federal Reserve Accountability and 

Transparency Act, pulling back the curtain of the Fed by increasing 

accountability and transparency by limiting Fed officials’ blackout 

periods to discuss policy with Congress, opening the rulemaking 

process, and requiring the Fed to provide a cost-benefit analysis for 

every regulation that it issues. 

Additionally, this legislation urges the Fed to adopt a rules-based 

approach to monetary policy, as Dr. Taylor had talked about for a 

number of times, instead of the continued improvisation strategy 

currently being employed. Should the Fed fail to adopt a rulesbased approach, it would then trigger an audit of the Fed’s books. 

I think it is important to note that our bill is complementary to 

H.R. 24, the Federal Reserve Transparency Act, which is before the 

Oversight Committee. It was introduced by our colleague, Paul 

Broun, and I am a cosponsor of it. 

But Mr. Chairman, again, I appreciate you calling attention to 

this important issue. And I am looking forward to hearing comments from the distinguished panel on my legislation to rein in the 

Federal Reserve. 

With that, I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from New York, Ms. Maloney, the ranking member of our Capital 

Markets Subcommittee, for 21⁄2 minutes. 

Mrs. MALONEY. I thank the chairman and all the panelists. 

Oversight of the Federal Reserve is important, but the Federal 

Reserve Accountability and Transparency Act goes far beyond oversight. It attempts to blatantly influence the Fed’s monetary policy, 

undermining the independence that economists believe is vital to 

a central bank’s success. This bill also goes far beyond the ‘‘Audit 

the Fed’’ bill that this House voted on last Congress. As one newspaper described it, it is ‘‘Audit the Fed’’ on steroids. 

6 

Under this bill, every time the Fed deviated from the Republicans’ desired monetary policy formula, the Fed Chair would be 

hauled up in front of Congress to explain herself. And, even more 

troubling, the Fed would be subject to a GAO audit and report of 

the monetary policy decisions, with Congress setting the parameters of the audit. 

As previous Fed Chairman Ben Bernanke said, allowing the GAO 

to audit the Fed’s monetary policy decisions would create a chilling 

effect and ‘‘would prevent the Fed from operating on the apolitical, 

independent basis that experience shows has been so successful in 

lowering inflation and promoting a strong economy for our country.’’ 

I would like to place in the record his statement before this committee on the prior bill, on ‘‘Audit the Fed.’’ This goes far beyond 

that. But he explains the chilling, terrible effect it would have on 

the independence and the ability of the Fed to make economic decisions that are separate from politics but are good for the overall 

economy of this country. 

The Fed’s independence is very important and crucial. Its credibility with the markets as an independent operator that is committed to achieving the goals of price stability regardless of political consequences would be compromised. 

So, while it is true that this bill doesn’t force by law the Fed to 

follow a particular formula for interest rates, it does attempt to 

bully the Fed into following the Republicans’ preferred monetary 

policy. This inappropriately interferes with the Fed’s independence 

on monetary policy matters, and I find it deeply, deeply troubling. 

I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from New Jersey, Mr. Garrett, the chairman of our Capital Markets Subcommittee, and coauthor of the legislation before us, for 

11⁄2 minutes. 

Mr. GARRETT. Thank you. 

And I begin by thanking the chairman for holding this hearing 

to consider the legislation to reform the Federal Reserve as it 

passes its 100-year anniversary. 

I want to thank the witnesses for appearing before the committee, as well. 

I would also like to recognize the gentleman from Michigan, the 

vice chairman of our Monetary Policy and Trade Subcommittee, for 

taking the lead and working on this legislation to reform the Federal Reserve. And I thank you very much for taking that effort. 

As the Fed passes its centennial mark, Dodd-Frank will soon 

mark its own 4-year anniversary. It is timely that this committee 

is currently considering how the Fed and Dodd-Frank have transformed our financial regulatory environment. I would submit that 

an already-muscular Federal Reserve bolstered by a 3,000-page financial reform law has resulted in a central bank that is on 

steroids. 

Since Dodd-Frank’s passage, the Fed has adopted a new mission 

of ensuring financial stability and serving as a macro-prudential 

regulator over our Nation’s entire financial system. And while some 

raise a question about the appropriateness of granting such vast 

authority to a single regulatory body, especially an authority 

7 

charged with the conduct of monetary policy, everyone should agree 

that great power must be accompanied by robust oversight. 

Unfortunately, there has not been a corresponding increase of 

much-needed transparency at the Fed. The Fed’s regulatory activities have taken place behind a fraternity-like veil of secrecy, obstructing openness and preventing proper accountability. 

For this reason, today we will consider legislation that would 

take a step forward to establishing an appropriate level of transparency considering the bank’s monetary, prudential, and supervisory functions. In particular, the FRAT Act would require the 

Fed to increase its responsiveness to Congress, increase the transparency of its regulatory activities, and foster accountability in its 

international negotiations. 

And I would just add, Mr. Chairman, that in light of the fact 

that Fed Chair Yellen testified before the committee back in February, it has taken 4 months for her to respond to us, as we have 

just now received her responses at this period in time— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Ohio, Ms. Beatty, 

for 2 minutes. 

Mrs. BEATTY. Thank you, Mr. Chairman, and Ranking Member 

Waters. 

And thank you to our witnesses. 

In addition to the comments, Mr. Chairman, that my colleagues 

have made in their opening statements, I must add that I am a little disappointed this morning, as I sit here wondering why we 

aren’t working to improve our Nation’s economy, rather than trying 

to find ways to hamstring the primary regulator responsible for 

overseeing the operations of our Nation’s financial markets. 

While I always welcome witnesses, I am disappointed that we 

continue to hold hearings on issues which are not at all time-sensitive to this committee. For example, with only 23 legislative days 

before the expiration of the Export-Import Bank, it seems a little 

shortsighted to hold a legislative hearing on a bill to reform one of 

the most effective agencies in the Federal Government, when what 

we should be doing is holding legislative hearings on H.R. 4950, a 

bill to reauthorize the Export-Import Bank, which would protect 

and create American jobs, help lower Americans’ trade deficit, and, 

importantly for my conservative colleagues, reduce the Federal deficit. 

I therefore encourage the chairman to strive to advance consensus-built legislation that can drive forward economic growth in 

a meaningful, policy-oriented way that helps, not harms, our Nation. 

Thank you, and I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from Minnesota, Ms. Bachmann, for 1 minute. 

Mrs. BACHMANN. Thank you, Mr. Chairman. 

Tragically, the Federal Reserve’s policies have facilitated deficit 

spending, encouraged the accumulation of $17.6 trillion in national 

debt, caused market volatility, failed to reinvigorate the sluggish 

American economy, and will cause inflation that will harm American families and businesses. 

8 

Fortunately, our colleagues, Mr. Huizenga and Mr. Garrett, have 

introduced bills to encourage the Fed to use a rules-based monetary policy, opening the Fed’s decisions on international regulatory 

negotiations to public comment, bringing transparency to the DoddFrank stress test, clarifying the Federal Open Market Committee 

blackout period, and requiring cost-benefit analysis for all Fed regulations. I am pleased to cosponsor these bills. 

The ‘‘Audit the Fed’’ bill will provide Congress with necessary 

tools to provide additional oversight to the Fed’s ever-growing powers. 

It is high time and long overdue for us to pass these bills and 

get this done. I congratulate my colleagues on getting this done. 

And I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Indiana, Mr. Stutzman, for 1 minute. 

Mr. STUTZMAN. Thank you, Mr. Chairman. 

And thank you also to our witnesses today. 

Mr. Chairman, you and I and our House Republican colleagues 

have a long history of pushing tax and regulatory relief for families 

and small businesses. We do so in pursuit of long-term economic 

growth but also in the pursuit of fairness. 

The question is whether monetary policy reflects our goals. The 

Fed’s massive and growing impact on everyday Americans’ lives 

and its $4-trillion balance sheet is at least as impactful as tax and 

regulatory policy. 

Consider that the typical legislation in front of Congress is 

judged by a score from the CBO. The Fed, on the other hand, regularly weighs policies that can be judged by their impact on GDP. 

It is critical that we preserve Americans’ confidence in the objectivity of their central bank for the 21st Century and beyond. That 

is why the Fed must adopt a rules-based approach to monetary policy and focus on the long term. 

I look forward to today’s discussion and again thank the chairman for calling this hearing. 

I yield back. 

Chairman HENSARLING. We will now turn to our panel of witnesses, each of whom, I believe, has testified before this committee 

in the past, so I will provide very brief introductions. 

First, we welcome Professor John Taylor, the Mary and Robert 

Raymond Professor of Economics at Stanford University and author of the ‘‘Taylor Rule.’’ 

Second, we welcome Dr. Mark Calabria, the director of financial 

regulation studies at the Cato Institute. 

Third, we welcome Ms. Hester Peirce, a senior research fellow at 

the Mercatus Center at George Mason University. 

And finally, we welcome Professor Simon Johnson, professor of 

economics at MIT. 

Without objection, each of your written statements will be made 

a part of the record. Again, since I think you all have testified before, you will be familiar with our lighting system. 

Dr. Taylor, you are now recognized for your testimony. 

9 

STATEMENT OF JOHN B. TAYLOR, MARY AND ROBERT RAYMOND PROFESSOR OF ECONOMICS, STANFORD UNIVERSITY 

Mr. TAYLOR. Thank you very much, Mr. Chairman, Ranking 

Member Waters, and members of the committee, for inviting me to 

testify. 

I would like to compliment Congressman Huizenga for bringing 

his son to this hearing. I always like to bring family members to 

my classes at Stanford. It really helps illustrate things. I was 

thinking of bringing my grandchildren today, but they are only 5 

and 3. But, to tell you the truth, it is their future we are talking 

about here, so it is very important. 

I want to focus my remarks on Section 2 of the Act, which is the 

requirements for policy rules for the FOMC. 

Many people for many years have shown that when monetary 

policy is conducted in a rule-like way, economic performance is better. There is price stability, unemployment comes down, growth is 

stronger, and productivity growth is stronger. 

That research is continuing. Just a few weeks ago, there was a 

conference at Stanford, where a whole slew of experts, some currently on the Federal Open Market Committee, spoke in favor of 

a rules-based policy because they know, they have seen that it 

works better. 

And there is experience that shows that. As Chairman Hensarling mentioned, when policy has been rules-based, the economy 

has performed well. And the example of that is the 1980s and 

1990s until recently. When it has not been rules-based, the economy has floundered and we have had higher unemployment. The 

1970s are an example of that, and, quite frankly, roughly the last 

decade is another example. 

So, the stakes are huge. I don’t think this should be a partisan 

issue in any way. 

Central-bank independence is very important, but it doesn’t seem 

to have been enough to prevent these swings towards more interventionist discretionary policy compared to a rules-based policy. So 

that is why I think that some legislation that goes beyond centralbank independence is important, and that is why I welcome especially Section 2 of this Act. 

Section 2 would simply require that the Federal Reserve stipulate its policy rule or its strategy for setting the instruments of policy. The Congress would not tell the Federal Reserve what policies 

to follow. That is the job of the Federal Reserve. 

The Congress, of course, has responsibility of oversight. And so 

the idea of this legislation is, when the Fed deviated from its own 

rule, it would be required to explain why. It seems to me to be the 

essence of transparency and accountability. How could someone object to that? 

I think the legislation is quite well-balanced, well-crafted, and 

well-designed. It definitely takes into account all the research I 

know about. And I have been doing this for 40 years, as you can 

tell by the color of my hair. 

I think it reflects the fact there are differences of opinion of how 

monetary policy works. But, in that context, it puts limits on the 

degree of excessive intervention that takes place in, I think, a 

transparent and accountable way. 

10 

It certainly allows enough flexibility for the Federal Reserve to 

react during a panic like in 2008 the way they did. There is nothing in here that restricts the Federal Reserve’s lender-of-last-resort 

responsibilities. Don’t let people tell you that. 

It also provides flexibility in the sense that the instruments of 

the Fed don’t have to be fixed. They move around, but they do it 

in a predictable, understandable, rule-like fashion. 

Moreover, the legislation is written in a way that if the Fed finds 

itself in a predicament because the world has changed or there is 

a special event, it can actually deviate from its own rule, as long 

as it explains why to the Congress and to the American people. It 

just seems so reasonable to require that. 

The legislation builds on experience of previous attempts of requiring the Fed to report. Actions that were removed from the Federal Reserve Act in 2000, this essentially replaces them. 

So I think it provides the appropriate degree of Congressional 

oversight without in any way restricting the independence of the 

Federal Reserve. 

Of course, some will object. I have already heard some of the objections right here. But if you look at the transcripts of the Fed, 

if you look at the speeches of Federal Reserve Members, if you look 

at what they have written, there is almost universal support for 

the concept of a rules-based policy. It is hard to find exceptions to 

that. 

Of course, they will say, well, maybe not now, we are not quite 

ready. But that is a difference of timing, really, not a difference of 

whether or not we should do it. 

I believe the Fed could really improve this legislation if it had 

constructive comments to make. But even as it exists now, I believe 

this legislation could be made to work by the Fed, it would improve 

economic performance, and they would make it work. 

Thank you, Mr. Chairman. 

[The prepared statement of Dr. Taylor can be found on page 89 

of the appendix.] 

Chairman HENSARLING. Dr. Calabria, you are now recognized for 

a summary of your testimony. 

STATEMENT OF MARK A. CALABRIA, DIRECTOR, FINANCIAL 

REGULATION STUDIES, THE CATO INSTITUTE 

Mr. CALABRIA. Thank you. Chairman Hensarling, Ranking Member Waters, and distinguished members of the committee, it is a 

pleasure to be back here. I hope I haven’t started to wear out my 

welcome yet. 

Let me first say that neither Cato nor I actually endorse specific 

pieces of legislation, but, with that in mind, I do think the general 

principles behind the Act are laudable. 

I am going to try to touch on each section, but I am going to just 

quickly say about Section 2, Professor Taylor has literally written 

the book on the topic. There is not really a lot I could add. I will 

just say that I would associate my remarks and very much support 

pretty much 95 percent of what he said in Section 2. 

So, with that, let me go to the other sections very quickly. 

11 

I think Section 3’s changes on the blackout period are very reasonable. It certainly would help Congress do its oversight in terms 

of nonmonetary policy. 

Let me say that Section 4 that covers the stress tests, I am worried because, since the stress tests are becoming such a core of 

bank prudential regulation, that they deserve scrutiny. I think they 

have repeatedly rested upon questionable assumptions. I would go 

so far as to say that I don’t actually think they have been all that 

stressful, and so I do think they need more transparency. I am worried they are becoming a substitute for sound risk management 

and regulation rather than a complement. 

More importantly, I am worried that the stress tests are encouraging greater uniformity across bank balance sheets. We saw this 

with the Basel Capital Accords, where they nudged banks into 

herding into similar assets, such as mortgage-backed securities and 

sovereign debt. Now, when everybody—that is, all banks—hold the 

same assets, then nobody is really a buyer. When everybody wants 

to be a seller, I worry that this contributes to fire sales and can 

cause, actually, shocks that would not be systemic to become systemic. 

So I am very concerned about the direction of the stress tests. 

In my opinion, a robust financial system would be one with a greater diversity of asset holdings, business models, and funding 

sources. I would prefer that the Federal Reserve reduce its reliance 

on stress tests and instead focus on simple, verifiable measures of 

bank safety, such as actual unweighted levels of common equity 

that actually can absorb loss. 

I will note as an aside, we were doing stress tests for Fannie Mae 

and Freddie Mac long before we were doing them for banks, and 

we saw how well that turned out. 

Let me quickly say on Section 5, the shift from a minimum 2- 

year appearance by the Federal Reserve to a quarterly appearance 

I think would really help improve communications between this 

committee and the Federal Reserve. 

Particularly, I think it would help a lot of junior Members. Obviously, the Chair and the ranking member have a tremendous 

amount of access, maybe not as much as they would like, but a tremendous amount of access to the Federal Reserve Chair. That does 

not hold true for Members across the committee. So I think having 

the Fed up here—and it is certainly worth saying that the Fed 

Chair is usually up here about 4 times a year anyhow. 

The additional reporting requirements in Section 6, to me, are 

fairly reasonable and welcomed, certainly on the rulemaking side. 

One of the things that has gotten the most controversy is Section 

7’s requirement for cost-benefit analysis. I feel that this would 

nudge the Fed to be more explicit about the assumptions that go 

into rules, which would encourage clearer thinking about the impact of those rules. 

Of course, some would object that subjecting the Fed to the costbenefit analysis would stifle the regulatory process. I will note that 

if you go back and look at the legislative history in the 1940s of 

the Administrative Procedure Act, the same things were said about 

notice and comment, that if you had to put rules out for notice and 

comment and public input, it would slow the process. Obviously, it 

12 

does slow the process. It takes a minimum of almost a year to really do a rulemaking seriously. But I think our objective should be 

not speed but quality. And just as notice-and-comment has improved the regulatory process, I believe cost-benefit analysis would 

improve the regulatory process. I certainly, however, don’t see it as 

a panacea. 

One of the things that I want to emphasize that I actually think 

hasn’t gotten much discussion but I actually think is one of the 

more important parts of the bill is that Section 8 of the bill allows 

individual Fed Board Members to have their own staff. This is the 

case at the SEC; this is the case at the CFTC. The Fed Board 

Members are far too dependent on the Chair, and they are far too 

dependent on the Fed staff. I would ask the Members of Congress 

here today to imagine what their lives would be like if they had 

no staff and they were dependent on the staff of the chairman of 

the committee. As much as I am fond of this chairman’s staff, you 

know that you would be at a disadvantage. The Members of the 

Fed Board are the same thing. So, again, this is a very small thing, 

but I think it actually would have a very big impact in the long 

run. 

Let me also emphasize, while several provisions of the bill address transparency in Federal Reserve rulemaking in the area of 

financial regulation, I believe our ultimate objective should be to 

get the Fed out of financial regulation. To me, that would increase 

the independence of monetary policy, but, just as importantly, and 

I think it is beyond dispute, the Fed has a lousy record at financial 

regulation. Despite its own problems, I would rather transfer those 

responsibilities to the FDIC. They have had their own problems, 

certainly, but I think they would do a far better job at it. 

I will also note that I have a few suggestions for qualifications 

of Fed Board Members in my written testimony which I believe 

would increase the Federal Reserve’s independence and reduce the 

degree of groupthink that so dominates the Board most of the time. 

I also want to end with saying, a lot of the conversations are 

about independence from Congress. I think the far more pressing 

concern in my mind is that we have to increase the degree—and 

this is not a partisan thing. I want the Fed to be independent of 

every Executive Branch President. We all know the history of Arthur Burns and the Nixon Administration; they were far too close, 

by any measure. I think this Fed and I think the previous Feds 

have acted as adjuncts of the Executive Branch, and I find that far 

more problematic than any insights and any influences that this 

body might have. 

Thank you. 

[The prepared statement of Dr. Calabria can be found on page 

61 of the appendix.] 

Chairman HENSARLING. Ms. Peirce, you are now recognized for 

a summary of your testimony. 

STATEMENT OF HESTER PEIRCE, SENIOR RESEARCH FELLOW, 

THE MERCATUS CENTER, GEORGE MASON UNIVERSITY 

Ms. PEIRCE. Chairman Hensarling, Ranking Member Waters, 

and members of the committee, thank you for the opportunity to 

be here today. 

13 

I will focus my remarks on regulatory as opposed to monetary 

policy. Regulatory and supervisory practice are areas where the 

Fed does need greater transparency, accountability, and more rigor 

in their processes. 

Before we look at these issues, we should think about some basic 

questions. Do we think that the Fed should be supplanting the private market in allocating capital and in designing the financial system? And do we think that it should be doing those things behind 

closed doors? 

Dodd-Frank expanded the Fed’s regulatory mandate over banks 

and non-banks, and the Fed has been aggressively pursuing that 

mandate. And as a consequence of that, the Fed has been changing 

the way it approaches regulation and using a macro-prudential approach, which allows it to intervene in private decision-making and 

direct private financial institutions in a way that it thinks will enhance financial stability. 

But, as Dr. Calabria alluded to, that sort of push from the government towards the private sector has not always worked very 

well in the past. And to make matters more complicated and more 

troubling, the Fed has a penchant for nontransparency. What that 

means is that it is making these major decisions without the input 

from outside the Fed that might say, you are making a mistake, 

or you are taking an action that might actually be destabilizing the 

financial system. 

We can take steps to improve the situation. One would be to enhance the Fed’s accountability to Congress. And that could be done 

by having the Fed Chair appear more frequently before Congress. 

Another approach is to make sure that their regulatory agenda is 

being made clear and transparent to Congress so that Congress 

knows what regulations are in the pipeline. 

Another step that we can take is that the Fed’s rulemaking can 

be more rigorous, transparent, and accountable and afford more opportunities for public input. One way to do this is to have economic 

analysis. The Fed is an independent regulatory agency, and so, unlike Executive Branch agencies, it is not subject to Executive Orders that require economic analysis. 

And so, in asking the Fed to do economic analysis, what you are 

really asking them to do is identify the problem they are trying to 

solve, identify some solutions to those problems, and then do a costbenefit analysis to figure out what are the costs and benefits of 

each solution. And then, once you are ready to adopt a rule, you 

establish metrics so that you can go back several years later and 

see if your rule is actually working the way you intended it to 

work. 

It is important for this process to be done transparently and in 

the public eye so that the public can weigh in and sharpen the 

Fed’s analysis. Public input is also important in international discussions that the Fed is having. Of course, the Fed needs to be in 

constant communication with its international counterparts, but 

there is a concern that, internationally, decisions are being made 

and then they are being imported here without an opportunity for 

people here to weigh in. 

And, aside from external accountability, the Fed should have 

some more vigorous internal dialogue, which Dr. Calabria alluded 

14 

to. I think that is very important. And one way to do that is to enable each Governor to have a small staff of his or her own who can 

work on issues that are important to him or her and not be responsible to the Chair. 

The Fed is turning 100, and it is an important time for us to 

think about reforms. I think we need to frame those by asking 

some fundamental questions. Do we feel comfortable with having 

the Fed supplant and override market decision-making? And if we 

do feel comfortable with that, what is the proper level of accountability and transparency and oversight? 

Thank you very much. 

[The prepared statement of Ms. Peirce can be found on page 84 

of the appendix.] 

Chairman HENSARLING. Dr. Johnson, you are now recognized for 

your testimony. 

STATEMENT OF SIMON JOHNSON, RONALD KURTZ PROFESSOR OF ENTREPRENEURSHIP, SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS INSTITUTE OF TECHNOLOGY 

Mr. JOHNSON. Thank you, Mr. Chairman. I would like to emphasize three points that I expand on in my written testimony. 

First, I liked a couple of the statements that you made in a recent speech, I guess it was published in the Cato Journal. The first 

was that the Fed must maintain its independence with respect to 

monetary policy. And the second was the Fed must always be led 

by experts trained in the science of economics, including, you mentioned, the Austrian and Chicago schools of economics. I know 

quite a few of these people, and they certainly have plenty of that 

training. 

I think those are laudable objectives and exactly the right goalposts to set. I think there is a tension, Mr. Chairman, between 

those goals and what you have in this legislation. 

As Professor Taylor has said, and as he and many colleagues 

have established with a lot of research, there are some advantages 

to rules with regard to monetary policy, particularly the predictability that you hope the central bank will bring to the economy 

and bring to its communications. Central banks have moved a 

great deal in the direction that Mr. Taylor and others have urged 

over recent decades. 

But what you have in this legislation is not going to make things 

predictable. This is worse than monetary policy by Congress; this 

is monetary policy by some sort of Spanish Inquisition. You are 

going to have the GAO come in and order these monetary policy 

decisions on a decision-by-decision basis on a fast timeframe subject to terms of reference drawn up by either the House or the Senate committee. 

I am just guessing that control of the House and the Senate will 

pass back and forth between the two parties in coming decades, 

based on recent history. So someone else will control one of these 

committees, someone not aligned with the current Republican majority on this committee. What pressure are they going to be putting on the central bank? Is that what you want? 

I think, as Ms. Waters said, you want an independent central 

bank with experts making the decisions. You need, certainly, to 

15 

have accountability, absolutely. I think that is a very important 

goal. But the experts have to have the ability to make these decisions. 

What you are going to get from this is a massive amount of volatility in financial markets. Imagine the research reports that people are going to be putting out. Remember when TARP was turned 

down the first time of asking in the House? Remember the volatility that came out of that? That is what you will be getting on 

a week-by-week basis under this legislation. Why would anyone 

who is pro-business, who is pro-private-sector-investment want 

that? I don’t understand. 

The second set of points are with regards to the cost-benefit analysis, the stress test, and the points about international negotiations. These are just designed to hamper effective regulation of any 

kind. 

The Federal Reserve does already go for extensive public comments on any major rule. Take, for example, the Volcker Rule, 

about which I testified before this committee not too long ago. 

There was a very detailed, extensive period, there was a lot of oversight. And when there was a particular part of the Volcker Rule 

that was not satisfactory to both Republicans and Democrats—you 

had the hearing in January—they fixed it. That is how the system 

is supposed to work. That is how it works. 

What you have with a cost-benefit analysis is a set of traps and 

snares that are designed to trip the regulators in front of the 

courts—procedural traps. The cost-benefit analysis doesn’t even 

consider the major costs of excessive risk-taking in the financial 

system. It never has—the CFTC version, the SEC version, the 

versions put forward for the Fed. Massive financial crisis, loss of 

1 year’s GDP at least, damage across the American economy, from 

which we are still struggling to recover, doesn’t figure in any of 

those tests. 

The stress-test proposal would simply allow the banks to game 

the system more effectively. The details, the specifications, the scenarios are given out by the Fed in advance. What they don’t tell 

you is the details of their models. Why do the banks want to know 

the models? So they can game the models. 

Go back and read the documents that came out in the ‘‘London 

Whale’’ case. Look at the very detailed micro way in which the 

JPMorgan executive was telling a trader how to game the reporting 

in order to pass the various Fed requirements. Look at that language. That is what they would be doing on a regular basis. 

And the international negotiations, you are putting a requirement in here that would completely prevent any attempt by the 

Fed to deal with an international crisis. Mr. Taylor says we should 

be able to do that, and I think he is absolutely right. You can’t 

agree on a swap line without all this notification period. You can’t 

have any of the regular daily conversations that I used to participate in when I was chief economist at the International Monetary 

Fund, at least as witnessing those negotiations. The Fed wouldn’t 

be able to do any of that. 

I do think the points about a Vice Chair for Supervision in the 

legislation make sense. I do agree that Governors having their own 

staff is sensible. 

16 

But I would say, particularly to Mr. Garrett, on these points 

about accountability and transparency, which are very good points 

and which were also in the earlier version of your legislation, you 

should be focusing more on the Reserve Banks. That is where there 

is an anachronism in the system. The Reserve Banks, the Presidents of which are sitting on the FOMC, are separate from, and not 

accountable to, Congress. Their Presidents are not appointed by 

anyone who is—not appointed in a direct fashion that is accountable to Congress. It is quite an anomaly which is left over from the 

1913 Act. 

And, particularly, I would emphasize the New York Fed. The 

New York Fed is a terrible problem, Mr. Garrett, from your perspective. And the head of the New York Fed is the Vice Chair of 

the FOMC. He has a quasi-fiscal responsibility. He is not appointed 

by the President of the United States. He is not subject to confirmation by the U.S. Senate. He doesn’t come and testify to you 

on a regular basis. That job, President of the New York Fed, should 

become a Presidential appointment, like the Board of Governors of 

the Federal Reserve System. 

Thank you. 

[The prepared statement of Dr. Johnson can be found on page 75 

of the appendix.] 

Chairman HENSARLING. I thank each of the panelists for their 

testimony. 

The Chair now recognizes himself for 5 minutes for questions. 

Dr. Taylor, what are the risks to our economy if we do not pass 

Section 2 of this bill? 

Mr. TAYLOR. I think, in many respects, you can look at the last 

few years to see the risks. It would be a period where we could 

again have the kind of bad economic performance we had. 

Remember, we had a serious financial crisis, we had a Great Recession, and we have had, unfortunately, a slow recovery. And that 

is during this period where people have assessed the policies have 

not been predictable and rule-like. And I would go back to 2003, 

2004, and 2005, where the rates were held very low for too long. 

It is a period where people are saying, is that happening now? 

So I think the most likely risk is we would continue with this 

subpar economic performance, which no one wants to have again. 

I can’t believe we would like to go through that again, but we run 

that risk very greatly. 

Chairman HENSARLING. Dr. Calabria, a portion of your written 

testimony that you did not deliver orally since you did not focus on 

Section 2 says, ‘‘Section 2 does not require a specific model. In no 

way does it limit the Fed’s choice of model. It simply requires the 

Fed to publicly share the model. All of the Fed’s actions in recent 

years would have still been possible had Section 2 been in place. 

There is nothing in Section 2 that is inconsistent with the Fed’s 

dual mandate, nor is there anything in Section 2 that would require the Fed to raise or lower rates. There is no compromise of 

the Fed’s operational independence.’’ 

Dr. Taylor, do you agree with Dr. Calabria’s assessment? 

Mr. TAYLOR. Yes, very much so. I think the idea here is to exercise oversight that is the responsibility of the Congress but to continue to allow this independent agency to conduct monetary policy. 

17 

The difference from current law is that the central bank would 

be required to describe its strategy for setting its interest rate, for 

example, in a manner that can be understood and be analyzed. And 

that is frequently called a policy rule, which is simply a way to describe how the interest rate changes under certain circumstances. 

It is used all the time. The Fed is always looking at policy rules 

right now, but they just don’t articulate it or talk about it very 

much. 

So I agree very much with this. This doesn’t really change the 

independence of the Fed. It has the ability to set its policy. 

Those at the Fed who may disagree with this but are sympathetic to policy rules say, well, we will just do this on our own. But 

I think the truth is, if you look at the history, they have gone back 

and forth, and that has not been enough. So I think the experience 

is that we have to do something more. We have to—you have to 

hold them accountable to follow the kind of policy that works. 

Chairman HENSARLING. In my opening statement, I quoted Chair 

Yellen from an earlier point in her career, where I believe she said 

rules-based monetary policy—I think she was actually speaking 

specifically of your rule—is ‘‘what sensible central bankers do.’’ 

I questioned her about this in her last Humphrey-Hawkins testimony. I don’t have her testimony right in front of me. I hope I can 

do it justice. I think the essence of her answer was that she does 

not disagree with herself, but I think she believes that the timing 

is wrong. 

Do you have a comment on that? And when might the timing be 

right if it is wrong today? 

Mr. TAYLOR. I have talked to Chair Yellen for many, many years, 

decades probably, about this issue, and she has always been supportive of this kind of approach. 

What she says now is the time is not quite right; we are still not 

in a normal situation, we are still too close to that financial crisis. 

And I just disagree with that. I think it is time to get back to the 

kind of policy that worked well in the 1980s and 1990s until recently. And, in a way, that is, to me, promising, because if the disagreement is about when, not if, then we are making progress. 

This legislation goes further, in thinking not just about the current Chair but about the future of the Federal Reserve and how it 

operates. So I think it is very important to put in place something 

that provides the continuity in this very sensible way with which 

she has had so much experience. 

Chairman HENSARLING. Dr. Calabria, in your written testimony, 

again, that you did not deliver orally, with respect to Section 2, you 

also said, ‘‘Why is it important to reveal the Fed’s current operating model? So that it can be examined and tested by those outside the Fed. Only under such examination can we learn how accurately that model captures the real world.’’ 

Would you please elaborate? 

Mr. CALABRIA. Let’s start out with the observation that all policy 

choices entail some rule. It is either implicit or explicit. You have 

a model of how you believe the world works when you decide that 

A is going to result in B. So, certainly, the Fed is operating by a 

rule today. 

18 

The question is whether or not that rule is effective. I am sure 

that if Chair Yellen was here, she would probably express some 

concern that the last few years have not exactly worked out how 

the Fed anticipated it would. And I certainly think that is evidenced by how far off their forecasts have regularly been. 

So if we are going to try to figure out exactly why have they been 

off—and my suspicion is certainly, within the Federal Reserve 

Board, they are asking themselves this question every day, why 

have our forecasts wildly been off every time—it is because they 

have to rethink the model. 

So we could either rely on a small number of people across town 

to evaluate that model or we can try to incorporate all of the rest 

of us to try to figure out why that model works or does not work. 

My point would be that we really don’t know ahead of time. 

Economists have spent a lot of time—I think, with all modesty, we 

should probably, all economists, admit we don’t 100 percent, maybe 

not even 50 percent know how the economy works. And you are not 

going to figure that out unless you put models out there, unless you 

test them, unless you disprove them and move on to other models. 

And, again, I would emphasize, the Fed is operating under a 

model. It is time they shared it with the rest of us. I think it is, 

again, fairly clear that model has not successfully predicted the responses of the economy and that we all try to figure out what actually would work. 

Chairman HENSARLING. The Chair now recognizes the ranking 

member. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Dr. Johnson, you expressed a number of concerns with the impact of requiring the Fed’s monetary policymakers to prescribe a 

detailed rule for setting monetary policy which would then be subject to audits by the Government Accountability Office. 

First of all, I am absolutely intrigued by the fact that we have 

our witnesses here today talking about why the Feds should have 

independence and how it should not have interference by the Congress of the United States. On the other hand, the testimony here 

by Dr. Taylor and others is basically a prescription for interference 

by prescribing a rule. 

But I would like you at this time, Dr. Johnson, to elaborate a bit 

on why the imposition of GAO audits on a monetary policy rule 

would have a chilling effect, creating obstacles to productive work 

and bringing more partisan pressure to bear, as you put it in your 

testimony, and at the same time our witnesses have said, oh, the 

Feds will have all the flexibility that they want and they need. So, 

there are some contradictions here. 

Could you comment on these GAO audits? 

Mr. JOHNSON. Certainly, Congresswoman. 

What we have learned over 100 years and what has also been 

learned in other industrial democracies is that you can and should 

have specification of the objectives of monetary policy coming from 

the legislature, in our case, coming from governments in other different kinds of democracies. So you tell the central bank what objectives you want. In our case, we have a so-called dual mandate. 

And then the central bank decides how to achieve those objectives, 

19 

using the expert analysis that Mr. Hensarling accurately described 

in his article. 

What you are doing with this GAO structure is you are putting 

in a set of people, as I read the law, who have this sort of prosecutorial power. They are auditing; they are going through everyone’s 

emails. They are reconstructing exactly the base on what has happened. They are understanding the models that were used or were 

not used. They are doing this on a very rapid basis, according to 

the timeline in this legislation. 

The exact terms of reference of those audits actually will be specified on a case-by-case basis, according to the legislation, so you 

don’t know exactly what is happening on this fishing expedition. 

What are they going after? What are they looking for? What is the 

issue? 

And it would introduce a huge amount of uncertainty for the individuals. Do individual Federal staffers need to obtain the advice 

of legal counsel, for example, which is what happens when GAO 

goes in or Inspectors General look at actions at the SEC and other 

places. 

All of this has to affect how these experts interact. Are they just 

arguing about the substance, or are they thinking, okay, how is 

this going to look to the GAO? What is the pressure that is coming 

to us from different people in Congress, from the House committee 

and presumably from the Senate committee? 

I really don’t see how that is going to help you get the best expert analysis and decision-making to obtain the objectives that you, 

Congress, have set for the central bank. 

Ms. WATERS. Ms. Peirce, do you believe that the individuals on 

the Open Market Committee of the Fed, whether they rotate or 

not, have the expertise that is necessary to do the job? Or do you 

think that the confirmation that they have been given is sufficient 

for them to be able to have good judgment? 

Ms. PEIRCE. I certainly wouldn’t question the judgment of the 

members of the FOMC. I would say that I think we all benefit from 

getting input from other people. And so putting out a rule to say 

what you do and getting other people to give you feedback on that 

is generally helpful for any expert in making a decision. 

Ms. WATERS. So what you are basically saying is that in addition 

to their expertise and their backgrounds, perhaps those of you in 

academia should have more input and more advice and more influence on the Feds? 

Ms. PEIRCE. I certainly wouldn’t weigh in on monetary policy 

since I am a lawyer, and I think I would get killed by my co-panelists if I said that I would. So I would stay out of that. 

Ms. WATERS. I will let Mr. Johnson weigh in on this, too. 

Mr. JOHNSON. I think it is good to discuss Members of the 

FOMC. There is a range of opinions, and that is how Congress has 

decided, I think correctly, that monetary policy should be resolved, 

through this process of deliberation on the Open Market Committee. 

These people communicate all the time. They are always giving 

speeches, they are always interacting. If you talk about the regional Feds, they have various kinds of advisory committees with 

which they are engaged. The same thing is true at the Board. 

20 

Perhaps we might wish for more openness, certainly at the regional Fed level. That is a fair question. But they are absolutely 

engaged in communicating, and people are pressing them all the 

time with these opinions. That is a very healthy part of our democracy. 

Ms. WATERS. Thank you. 

I yield back the balance of my time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from California, Mr. Campbell, the chairman of our Monetary Policy and Trade Subcommittee. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

And thank all of you. 

Rather than me really asking some questions here, Dr. Johnson, 

you have given your very spirited opposition. While ostensibly 

agreeing with Dr. Taylor on lots of things, you have a very emotional and spirited disagreement with the elements of this bill, particularly Section 2, I guess. There are some elements that you 

agree with. 

So Dr. Taylor, can you respond to some of his objections, please? 

Mr. TAYLOR. Yes. I think that, as I hear Simon Johnson talk, his 

focus is not so much on whether we should have a rules-based policy; it sounds like there is agreement there. But it is just on how 

the accountability is brought into play. Now, I think you— 

Mr. CAMPBELL. Can I stop you a second, Dr. Taylor? 

Dr. Johnson, would you agree with that? 

Mr. JOHNSON. If the Federal Reserve, the Board of Governors 

and the FOMC, were to decide to have a rule or to move closer towards Mr. Taylor, I am not going to raise objections to that, and 

I don’t think that will be particularly a politically contentious question. You are decentralizing the decision-making to the experts. 

That is the principle under which we are operating. 

It is the imposition from the outside of the rule with this GAO— 

Mr. CAMPBELL. But, Dr. Johnson, if I can, we are not telling 

them what the rule should be. How is that any different, then— 

the Federal Reserve is chartered by Congress. It is the elected body 

here and the President who have to set these things up, and we 

have to provide some accountability. That is the way the Constitution works. 

So we are not telling them what the rule should be. We are just 

saying, do a rule, because history shows that is more effective and 

also provides more accountability in the market. 

Mr. JOHNSON. Well, Mr.— 

Mr. CAMPBELL. One of the things that frustrates me, I will just 

say, is that I see today, out in the real world, it seems like we used 

to, when rules were in play, sit around and ask, what is going to 

happen to the economy, what is happening in the markets, what 

are my customers saying, what are my suppliers saying, et cetera, 

et cetera. Now all anybody cares about is, what is the Fed going 

to do? It is like the Fed is running the whole show. And to me, that 

is a distortion of the way the economy and the private sector 

should work. 

So we are not telling them what the rule should be. We are not 

even telling them they have to follow it. But we are saying, please 

give the market some stability here, please give people—so that 

21 

there is some basis upon which you are operating other than tomorrow morning the Fed wakes up and decides: let’s do more quantitative easing; let’s suck it back; let’s put more in; let’s do this and 

that; and throws everybody for a loop. 

Mr. JOHNSON. Mr. Campbell, if you know, given the rule, why 

are you specifying in this detail the reference policy rule that has 

these specific ingredients? 

And then why are you putting all this pressure on them to have 

this directed policy rule that needs to be in alignment with or close 

to or you have to come and explain on a regular basis why it deviates and then you send the GAO in to check, why this deviation? 

It is like a police state for the central bank. 

Mr. CAMPBELL. The GAO? Having the GAO audit a government 

agency is a police—come on. The police state is the government 

they are auditing. That is the police state. 

Mr. JOHNSON. So is the Department of Justice. That’s a government agency. 

Mr. CAMPBELL. The police state is the IRS. The police state is the 

EPA. The police state is all that. That is the police state. 

Auditing is not a police state. Now you are really ticking me off. 

But I am going to go to Dr. Taylor here, who is itching to respond 

to your comments. 

Mr. TAYLOR. This idea of the reference rule—as you remember, 

the reference rule is the Taylor Rule. In fact, I kind of like the idea 

of ‘‘reference rule’’ rather than ‘‘Taylor Rule’’ because it allows me 

to sound more objective when I talk about it. 

But it doesn’t require them to be following the reference rule by 

any means. It simply says, hey, there is this reference rule out 

there that there have been thousands of papers written about. And 

it appears—if you go to any market discussion that is out there 

being discussed, anybody who talks about a policy rule compares 

it to this reference rule. 

So what is so harmful in just saying, as a reference, the Fed 

ought to do that? It is not required to follow it. It is just required 

to have a discussion like everybody else is having a discussion. And 

so I think it is a good idea to have it in there, but it doesn’t really 

say the Fed should follow it. 

Actually, if I could just add, the current Chair of the Fed recently 

gave a speech comparing what she thinks the policy should be with 

the reference rule. And so it is just a continuation of that thing, 

which I think is a healthy way to do it, and they would have to 

do that as part of their analysis. 

Mr. JOHNSON. If the central bank—I think it is the central bank. 

And if the Chair of the Fed can persuade the Congress to move in 

the direction of having this rule or making these comparisons, I am 

in favor. 

I am in favor of delegation to the experts, as Chairman Hensarling said in his article. That is what has served us better over 

the past 100 years than some other arrangement that we have 

tried and other countries have tried. 

Mr. CAMPBELL. All right. Thank you both for that. 

And in my last 10 seconds, I will just reiterate what I said before. I am in support of this legislation, but it can be modified. 

22 

That is why we are having this hearing. Maybe it needs some 

tweaks. Maybe there are some other things. 

But we really need—it will be best if we can get the economy out 

of operating only on Fed action and, instead, operating on the action of the real economy, and that is what I hope this can move 

us to do. 

I yield back 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from New York, Mrs. Maloney, the ranking member of our Capital 

Markets Subcommittee. 

Mrs. MALONEY. Thank you. 

Dr. Johnson, I would like to ask you about the restrictions that 

the bill places on U.S. regulators’—the Fed and otherwise—ability 

to negotiate with their international counterparts, having to inform 

Congress and so forth. 

As someone who used to work at the IMF, can you give us some 

insights on whether these kinds of international negotiations are 

important, especially in a globally integrated market such as finance. 

And would the restrictions in the bill put the United States at 

a competitive disadvantage in finance and being part of these negotiations? 

Thank you. 

Mr. JOHNSON. Thank you, Congresswoman. I think it is a very 

important issue. 

It depends, of course, on what you mean by ‘‘negotiation.’’ The 

legislation is somewhat vague on that. But if you mean entering 

into discussions of substance about policy and about what we are 

going to do, what you are going to do, and how there might be 

some quid pro quo, this happens all the time. 

Particularly if you are talking about financial regulation, you are 

talking about large, complex banks and other kinds of financial institutions operating across borders. 

For example, to the extent to which they comply with capital requirements in different places, to the extent that they are generating or not generating systemic risk in various places, to the extent that you are providing support or not providing support to various aspects of the system, these are things that central banks talk 

about all the time. 

Now, this is a delegation to experts again. There should be accountability. When there was a financial crisis, they were up here 

a lot; I think they testified before Congress 37 to 39 times in 2009. 

Those are the numbers that I have seen. 

But this would tie their hands. This says you have to give 90 

days’ notice to Congress and in various other ways and getting 

public comment before you have any kind of negotiation with 

other—anyone, including central banks. That is going to make it 

much harder to operate central banking in any reasonable fashion. 

And your point about competitive disadvantages is a good one. I 

think, if other central banks are able to operate in a better, more 

functional way, for example, within Europe between the Bank of 

England and the European Central Bank, for example, and the 

Swiss National Bank, and were excluded from that—at the moment 

23 

we are in that inner core of the most credible, well-run central 

banks in the world. 

If we had to step back from that, if our central bank can’t go 

there or has to be mute in all of those meetings, that is a serious 

disadvantage to the broader competitors, not just of our financial 

sector, but much more broadly of our economy. 

Mrs. MALONEY. All right. Could you elaborate more? How do you 

see that would hurt our economy and our jobs and our country? 

Mr. JOHNSON. I think the most important issue that comes up on 

a daily basis is with regard to capital, for example, and there is a 

lot of agreement across the political spectrum that we need high, 

strong capital requirements or whether they should be Tier 1 common equity so it is fully loss-absorbing and so on. 

Now, these financial institutions that we have allowed to operate 

across borders are very complicated. They have different capital requirements in different places. They are, frankly, gaming the system on an hour-by-hour basis, if not more frequently than that. 

And the central bankers and other regulators need to be in constant communication with regards to, is there sufficient underlying 

capital protecting the taxpayer against the risks that have been 

generated by these various financial institutions? 

If you run your capital requirements in a sensible way and recognize all the cross-border dimensions, then you get a safer system, 

not, I am afraid to say, a completely safe system, but a safer system. 

If you have to exist in isolation, if you can only look at that part 

of JPMorgan Chase or that part of the BNP Paribas in your jurisdiction—because you are not allowed to talk to anyone else because 

that would be considered a negotiation—that is going to be a much 

less effective regulatory system. 

And everyone across the political spectrum agrees we should regulate capital. There has to be minimum levels of equity capital in 

this business. 

Mrs. MALONEY. Okay. Do you think that the cost-benefit requirements that this bill would impose on the Fed and the FSOC would 

just slow the rulemaking process down by suing in court? And, in 

your opinion, would this lead to better regulatory outcomes from a 

systemic risk perspective? 

Mr. JOHNSON. I think that the cost-benefit analysis, as formulated here, is designed to trip up the regulator to—the courts, as 

you know, only test on procedural grounds, whether you checked 

every single box. If you didn’t respond to a single report that was 

put at the behest of a single lobbyist on the industry side, you have 

trouble with that. 

There is no standing for the public in these cost-benefit analyses. 

If the public thinks that the regulation is too weak, you don’t have 

standing to sue. 

The people who have standing to sue are the industry who filed 

a thousand comment letters and another thousand technical reports and you didn’t get to the 999th one of them. Then the whole 

thing is going to get thrown back to you. 

Of course, regulation becomes less effective and you are going to 

have, over the medium term, more systemic risk, more danger, 

24 

more risk of a massive financial crisis and another deep global recession. 

Mrs. MALONEY. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, vice chairman of our Monetary Policy Subcommittee, 

and coauthor of the legislation. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

Man, there is a lot to cover. So first of all, I am going to talk 

a little bit about oversight. And I, like Mr. Campbell, was finding 

myself getting more and more steamed. 

I cannot figure out, Mr. Chairman, why so many of my colleagues 

are willing to hand over their constitutional standing, I would 

argue their constitutional duty to fulfill oversight responsibility. All 

right? 

So I started Googling ‘‘oversight.’’ A CRS report popped up. CRS 

says, ‘‘Congressional—oh, but this is Wikipedia; so, we are not 

going really deep here—we can go even further—oversight refers to 

oversight by the United States Congress on the Executive Branch, 

including the numerous Federal agencies—U.S. Federal agencies. 

Congressional oversight refers to the review, monitoring, and supervision of Federal agencies, programs, activities, and policy implementation. Congress exercises this power largely through its 

Congressional committee system.’’ 

I then went even deeper. My son Garrett, who we have referred 

to and talked about, just got done with AP Government. So, guess 

what, I went to the AP Government flash cards on oversight. They 

say roughly the same thing. 

What I can’t figure out is why colleagues here are willing day in 

and day out to hand that responsibility over to an Administration, 

regardless of whether there is a ‘‘D’’ or an ‘‘R’’ behind it. What happened to the people who are going to go and fight for their legislative standing, constitutional standing? I don’t understand this. 

Second, let’s get specific about my bill and Mr. Garrett’s bill. Section 2(c)—all right?—page 5, for those of you following in the program. All right? Page 5 through page 8 is where we talk about this 

stuff. All right? We clearly lay out that—submitting a directed policy, requirements for the directed policy rule, and then going into 

what that GAO report is. 

It says, when a rule is materially changed—that means significant—right, Ms. Peirce, the attorney?—significantly changed, then 

and only then will they go in. And, oh, by the way, that is after 

the open rules market submits—next page, on page 8—GAO approval of the update. 

The Federal Open Market Committee shall submit an explanation for that determination that it either, A, cannot or should not 

be achieved. 

They submit an explanation for that determination and an updated version of the directed policy to the Comptroller of the Currency of the United States and the appropriate Congressional committees. Oh, yes. By the way, that is us doing our oversight. 

I think we have to look at this, and it seems to me that it is 

clear. If the Fed complies with the law and submits a real rule, 

none of what Dr. Johnson is describing can happen. 

25 

Submit a rule and then explain it. That is all we are saying. We 

are not saying what the rule is. We are not saying what the final 

goal is. Explain yourself. 

Now, having gotten that out of my system, Dr. Taylor, I am curious who and what other central banks around the world use a 

rules-based policy and what has been their experience. 

Mr. TAYLOR. I would say many have, during particular periods, 

and when they have, things have worked quite well. I would put 

it this way: they sometimes deviate, some more than others. 

But there are quite a lot of studies that, as best we can, determine when a central bank is coming close to a rule or their policies 

are described by a rule like this or others and— 

Mr. HUIZENGA. And have they experienced a Spanish Inquisition 

within their own oversights, structures? 

Mr. TAYLOR. There are different approaches. Some countries require that the central bank follow a particular inflation target. 

Others, the banks adopt that themselves. But, no, I don’t know of 

this inquisition problem occurring at all. 

Mr. HUIZENGA. Let the record note that he is smirking while he 

is saying that. 

I am curious, Dr. Taylor, and Dr. Calabria, do other central 

banks do the regulatory function to the level that we are seeing 

under this change with the Federal Reserve because of DoddFrank? 

Mr. CALABRIA. It is certainly mixed. Some central banks around 

the world have no bank regulatory function. Some do not. There— 

Mr. HUIZENGA. How about the ones that are more successful 

than others? They are not— 

Mr. CALABRIA. There is actually a recent study by Barry 

Eichengreen at UC Berkeley—certainly no free-market radical— 

who came to the conclusion that those central banks that do not 

do bank regulation have less inflation and more economic stability. 

So I go back to an earlier point I made, which is that I think we 

need to rethink whether the Federal Reserve should be the primary 

bank regulator here. 

I do want to make a point before we end, though. 

A lot of the conversation has painted the GAO—let me say, as 

someone who has often disagreed with the GAO, but as someone 

who has requested GAO reports as a staffer, someone who in the 

Executive Branch has been on the receiving end of GAO audits, I 

know of few parts of the Federal Government that are less political 

than the GAO. 

They are a very unbiased organization. They are not like Inspectors General. They do not have subpoena power. They don’t go 

around carrying guns. As you know, lots of agencies ignore them 

all the time. But I think that they are a very apolitical organization, as apolitical as you get in the Federal Government. 

Mr. HUIZENGA. All right. And, unfortunately, my time has expired. But thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Ms. 

Velazquez, for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

26 

Dr. Johnson, at the height of the financial crisis, small businesses were severely impacted by a lack of access to capital. 

There wasn’t a day when this committee held a hearing where 

we didn’t hear Members from both sides of the aisle talking about 

the fact that small businesses in their districts were having trouble 

accessing capital. 

So I would like to hear from you, how could this bill impact the 

supply of credit for small businesses during periods of economic instability? 

Mr. JOHNSON. Congresswoman, I think it is an important question and, obviously, not a hypothetical one. We have recently had 

this experience. 

The point of delegating to experts is so that they can, at various 

points, decide that you need to take some actions different from 

what would be standard. 

And in the case of a financial crisis, I think all the experts I 

know would argue in favor of extraordinary measures to try and 

preserve exactly the kind of thing you are talking about, which is 

credit available to small business, small business which has probably not been a big part of causing the crisis and which is a big 

part of getting the economic recovery. 

Ms. VELAZQUEZ. Correct. 

Mr. JOHNSON. So this is where we come to the issue of the 

chilling effect. I am completely in favor of oversight by Congress, 

and that, of course, was the point of all the hearings that you had 

not just with small business, but also with the Federal Reserve. 

That is why they were here so often explaining what they were 

doing. 

We have a lot of very effective oversight built into the American 

system. But when does that oversight shade over and become a 

chilling effect? When do the experts feel that they can’t make the 

decision on the basis of that apolitical expert knowledge? When do 

they feel that there is some sort of political agenda hanging over 

them? 

I agree that the GAO, in some instances, is apolitical. But here 

in this legislation they would get specific instructions on the terms 

of each audit from this committee or its Senate counterpart. That 

has to have a chilling effect. 

Ms. VELAZQUEZ. Thank you. 

Ms. Peirce, Section 7 imposes cost-benefit provisions similar to 

those that were being imposed on the Securities and Exchange 

Commission, and it will require conducting cost-benefit analysis. 

This unfairly ignores the extensive analysis that economists and 

experts of the Federal Reserve already do. They have to comply 

with the Paperwork Reduction Act, the Congressional Review Act, 

and the Regulatory Flexibility Act. 

So although cost analysis is a similarly common-sense requirement, in practice, this provision will be highly unworkable. 

And I would like for you to explain to me, how should the Federal Reserve value the benefits of preventing a financial crisis or 

averting a market failure associated with the absence of a particular regulation? 

How would the Federal Reserve prove in court that the estimated 

benefits are reasonable if the crisis the Federal Reserve seeks to 

27 

prevent through its regulation has never occurred? Will you explain 

that? 

Ms. PEIRCE. Yes. I think that you raised a really important question, which is tying a particular rule to a crisis. We often try to justify rules by pointing to a financial crisis and saying, ‘‘Well, surely 

we want to prevent another crisis.’’ And we can all agree on that. 

But I think that the discipline of an economic analysis requires 

the Fed to look at a particular rule and say this is the role that 

it would play in preventing another financial crisis, and it can 

make predictions about what the costs would be of a crisis and 

what benefits you would get. 

And so then having that very rigorous and clear, you make your 

assumptions clear so that other people can challenge your assumptions. And you make the data clear that you are using, and then 

people can provide you additional data to challenge that. 

And then, if that does get challenged in court, then the court can 

look and they can—it is more of a procedural thing to see what the 

Fed actually did. 

Ms. VELAZQUEZ. So, Ms. Peirce, you don’t feel—and, Dr. Johnson, 

if you would like to answer—that this type of regulatory requirement will prevent the Federal Reserve from acting accordingly 

when we are facing an economic crisis? 

Ms. PEIRCE. Not at all. And it gives the Fed—it may take the 

Fed a little bit longer to adopt a rule, but these rules are in place 

for years and years. 

And so what we will end up with is we will end up with higher 

quality rules that enable—that stand the test of time better because it will have gone through a rigorous process. 

Ms. VELAZQUEZ. So you don’t feel that it will be an attempt to 

bring the Federal financial regulatory oversight to a halt? 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentlelady from West Virginia, 

Mrs. Capito, chairwoman of our Financial Institutions Subcommittee. 

Mrs. CAPITO. Thank you, Mr. Chairman. 

I want to thank the panel, too. 

One of the issues that I have discussed with current and former 

Federal Reserve Chairs is the effect that this low-interest-rate environment has had on our savers, and particularly our seniors. 

I represent West Virginia. We have an elderly population. And 

a lot of our folks are trying to live within the boundaries of what 

they had planned for and those fixed-income products like CDs and 

everything to support their income. 

So my question is: Would a rule-based monetary policy produce 

a more balanced approach that doesn’t overly penalize a saver, particularly those in their senior years who have actually saved and 

planned for the future? Do you see this rules-based monetary policy 

having any effect on that? 

And, Dr. Calabria, I see you shaking your head. So I will give 

you a shot first. 

Mr. CALABRIA. First, let’s start out—because I think it has been 

implied that a rules-based policy would necessarily always result in 

higher rates. That is not necessarily the case. There are certainly 

28 

times in the past when a rules-based policy would have suggested 

lower rates. 

But I would be the first to say that certainly my read of the evidence—and I will defer to Dr. Taylor on this—seems to suggest 

that a rules-based policy would, on average, have suggested higher 

rates over the last decade and certainly over the last few years. 

Mrs. CAPITO. Would it—Dr. Taylor, go ahead, and then I will ask 

a follow-up. 

Mr. TAYLOR. First of all, it is very important to realize that a policy rule doesn’t necessarily mean higher rates or lower rates. It 

means that the rates are adjusted in accordance with the state of 

the economy— 

Mrs. CAPITO. Right. 

Mr. TAYLOR. —the way this works. 

Right now, I would say most policy rules that are out there 

would suggest rates would be not zero, but positive—at least slightly positive. 

I never would say we go there instantly, but it would be—should 

have been something that we could have been prepared for. So, in 

that sense, the zero rates would not still be there. 

Mrs. CAPITO. I would say— 

Mr. TAYLOR. I believe, to some extent, that would be because the 

economy is doing better. 

Mrs. CAPITO. Right. 

Mr. TAYLOR. It is a different policy, a better economy, and, therefore, higher rates. But even without that, they would be higher. 

And the zero rates cause other problems besides the ones you are 

mentioning. 

The money market doesn’t operate very well at that point. To the 

extent that quantitative easing is part of that policy, it is a massive 

intervention into the capital markets. Price discovery is affected. 

And so there are a lot of unintended consequences as well as the 

fact that it is affecting frequently older people, causing them to 

take extra risks, et cetera. 

Mrs. CAPITO. One of the things I think that—correct me if I am 

wrong here—would provide for would be the predictability of where 

to go. 

So if you are looking for buying short term, long term, or somebody is helping you with financial planning, you may be able to 

plan slightly better. That is one of the advantages I see. 

Dr. Johnson? 

Mr. JOHNSON. I think, though, the reason interest rates are so 

low and the reason that your constituents are having so much trouble, the elderly ones, is because we had this massive financial crisis. 

And we should be addressing that through other measures, including much higher capital requirements that would be complementary. 

Mrs. CAPITO. Which I think they are. Correct? 

Mr. JOHNSON. So I just—and I like to quote John Allison, who 

is the head of the Cato Institute and a former BB&T executive, 

who was arguing recently for a 20 percent capital ratio. 

I think that is something you can agree on across the political 

divide here that would exactly address your problem, Mrs. Capito, 

29 

which is to make the world safer for people who rely on those fixedincome products to finance their requirement. 

Mr. CALABRIA. Mrs. Capito, if I can make a point? 

Mrs. CAPITO. Yes. 

Mr. CALABRIA. Because I do agree with this, but I do want—this 

ties back to an earlier point because Professor Johnson has repeatedly told us that we need to rely on the expertise of experts. 

I would remind him that a decade ago, the Federal Reserve was 

arguing for eliminating any sort of leverage ratio in the Basel Capital Standards. 

And certainly, when I was a staffer on the committee—and I am 

going to applaud the efforts then of Senator Shelby and Senator 

Sarbanes to push back on the Fed—we would have not have heard 

that if it weren’t for the FDIC telling on them, basically. 

So, having this advance notice of what is going on internationally 

delayed the implementation of Basel II, which meant that American banks actually had—as little capital as they had, they had 

more capital than they would have had they implemented Basel II. 

Mr. JOHNSON. There is no question— 

Mrs. CAPITO. I am going to—I will let you guys debate when 

you— 

Mr. CALABRIA. My point is that— 

Mrs. CAPITO. I want to ask one more question on the cost-benefit 

analysis because this is something that I think is being held out 

as some sort of villain here when I really think—we have heard repeatedly in this committee in testimony from all kinds of employers 

and financial institutions, et cetera, on the—not so much one—the 

burden of one additional regulation, but the cumulative burden. 

And I think if you are looking at a cost-benefit analysis of adding 

a new regulation rule, that is where the value could really be, not 

looking so much at one singular rule or regulation, but looking at 

how it is reacting and interacting with all the other ones that are 

already in place. 

And, with that, I see I have lost the rest of my time. But thank 

you. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Missouri, Mr. Cleaver, for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

And I thank the witnesses for being here. 

I just have one question, but I want to preface it by expressing 

a personal opinion, which is that after 6 years during which our 

economy teetered on the very edge of collapse, our country is moving forward. 

And I think most of the economic news that we are seeing and 

reading about is positive, and we seem to have climbed out of the 

depths of the Great Recession. 

We are increasing our GDP, lowering the rate of unemployment, 

although the unemployment numbers seem to be a bit stingy. I 

think there are some socioeconomic reasons for that, but we can 

see that we are improving the state of an almost-devastated housing market. 

Now housing sales, at least based on what I am hearing from my 

REALTORS®—the REALTORS® in my district, are the strongest 

they have been since 2006. 

30 

And so I am applauding the economic growth, and I believe that 

the Fed has taken many proactive and, yes, unconventional steps 

to resuscitate our economy. 

And so, Dr. Johnson, I am wondering whether or not you think— 

and, frankly, all of the members of the panel—that, had the proposed reform been effective during the beginning of the 2008 financial crisis—do you think the Federal Reserve would have been able 

to do what they have done in the midst of being constrained from 

taking proactive measures to get us back on track? 

Mr. JOHNSON. I think that is a very good question, Congressman, 

exactly on target. 

Now, I understand that, hypothetically, you could read the legislation to say there wouldn’t be a constraint, that they could just 

say, ‘‘It is a crisis. We are going to do these dramatic things.’’ 

But if you think back to 2007, 2008, as the crisis began to develop, how much controversy there was about what the Fed should 

be doing, how it should be doing it, the pressures that they faced, 

you could add this on top of all of that—and there was appropriate 

oversight. Right? So there were plenty of times that Mr. Bernanke 

and his colleagues appeared before this committee and other committees to explain what they were doing—but you would add another layer on top of here, which could potentially have been about 

multiple audits and creating this uncertainty, for example, for financial markets, is this or that Fed decision going to be secondguessed or is there going to be pressure to overturn it from a particular House or Senate committee. 

I don’t think having Congress involved in this kind of micromanagement, which is what it is, of the Federal Reserve is a good 

idea, in general. I am particularly worried about what would happen at times of national emergency, including financial crisis. 

Mr. CLEAVER. Yes. I would like for you to respond. I just need 

to say before you, sir, my thought was, because I was here during 

that time—I think everybody on this committee is reasonably 

sharp. Some of us have degrees in geography and physical education. 

I am just wondering how impactful and positive Congressional 

interference would have been. 

Mr. TAYLOR. Congressman, I think it is very important to go 

back in time to before the crisis hit to answer your question. 

There was a period, especially 2003, 2004, and 2005, where the 

interest rate was very low and then was raised very slowly. By 

most analyses—and there is disagreement—that was a period 

where the Fed deviated from the kind of rule that worked well in 

the 1980s and 1990s until that time. 

I believe that was one of the reasons for the search for yield, the 

excesses in the housing market, not everything, but which ultimately led to the bust and, therefore, to this terrible situation we 

had in the crisis, in the recession, and the slow recovery now. 

So, to me, if this kind of legislation had been in place then—and, 

remember, in the year 2000, the legislation is reformed to take out 

reporting requirements. 

But if in 2000 say, for example, this kind of legislation was put 

in place instead, at least the Fed would have been up here explaining and being questioned about why it deviated from its policy. 

31 

And I think, ultimately, it would have deviated less and we 

would have been in a much better situation. The economy would 

have performed much better in the last decade than it has. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Garrett, chairman of our Capital Markets Subcommittee, and coauthor of the legislation. 

Mr. GARRETT. Thanks, Mr. Chairman. 

So let’s look to see where we all agree. And it sounds like, actually, there are a number of points on which the entire panel agrees 

on the underlying legislation. 

Mr. Campbell from California raised a point. He said that businesses should not be so focused on what the Fed is doing every day. 

They should be focused on what the markets are doing, what consumer demand is, what is the volatility of the markets, what suppliers are, and that sort of thing, and not so much on the Fed. 

And I think, if I looked at the panel, you would all agree with 

Mr. Campbell’s assessment that we are too focused on the Fed’s activity daily as opposed to—do I get a nod sort of like that? Sort of. 

So then the question is: How do we turn that around? Now, one 

piece in the bill simply asks that the Fed Chair, instead of coming 

up to Congress twice a year, that he or she comes up here 4 times 

a year, quarterly. 

Does anybody disagree about having the Fed Chair come up here 

quarterly as opposed to twice a year? Is that a bad thing as far 

as—just say yes. Does anybody disagree with that? 

Mr. JOHNSON. Yes. I disagree with that. 

Mr. GARRETT. Oh. Okay. See, here I thought we could get over 

saying that we agree. 

Because my next question was going to be: Does anybody disagree with the next provision, Section 6, which says, on the supervisory and regulatory side, we have that the Fed Vice Chair of Supervision should also—it is their responsibility to come up semi-annually to testify as far as regulations? 

Does anybody disagree that he or she should be coming up and 

testifying semi-annually on what they are doing? Does anybody disagree with that one? 

Mr. JOHNSON. I do more than agree, Mr. Garrett. I think you 

have very good language in there about who should testify when 

there isn’t a Vice Chairman of Supervision. 

Mr. GARRETT. Yes. All right. 

Mr. JOHNSON. In terms of implementing Dodd-Frank, that is essential. 

Mr. GARRETT. So there is some disagreement as to how often the 

Fed Chair should be coming here. And the question there is: What 

good does it do actually when the Fed Chair does come here? 

Because, as you know, the Fed Chair was here—when was it, 

Mr. Chairman?—about 4 months ago. And, at that time, we had 

some specific questions as to what she was doing, and we asked 

them and said, ‘‘Would you get back to us?’’ Four months later, we 

just get our answers now. 

Would anybody say that a 4-month response from the Fed is a 

timely and responsive and responsible response from the Fed? Does 

anybody say that is timely, responsive, and responsible? 

32 

Mr. JOHNSON. Mr. Garrett, what exactly were the questions? 

Were they detailed, technical, hard questions— 

Mr. GARRETT. Well, we got the answers back. 

Mr. JOHNSON. —or were they straightforward questions? We 

don’t know those details. 

Mr. GARRETT. Then, I guess the American public doesn’t know 

the answers either. And that goes to the overarching question of— 

to my first question, if we can’t have certainty in the marketplace, 

then the market is continually going to be looking on a daily basis 

to what the Fed is doing. 

All the underlying legislation is trying to do, is to provide certainty in the marketplace. We are not telling the Fed what to do. 

We are just saying, ‘‘Please, please let us know what you are doing 

and give it to us in a timely manner.’’ 

One way to do that is to help us out with an economic analysis. 

Now, this wasn’t my idea. We crafted our language from President 

Clinton’s and President Obama’s Executive Orders. 

Apparently, those two gentlemen thought it was prudent that the 

American public have, from their Federal agencies, an economic 

cost-benefit analysis before agencies take actions to see whether 

the cost of something is greater than the benefit. 

So does anybody disagree with President Clinton and President 

Obama when they signed Executive Orders saying that there 

should be cost-benefit analysis for the agencies that they did? I 

guess there is always one. 

Mr. JOHNSON. Can you take the Executive Order cost-benefit formulation to the courts in the same way that you could take your 

legislative cost-benefit analysis to the courts, Mr. Garrett? 

Mr. GARRETT. Actually, we can, because the courts have been 

able to do that, and the district court was quite able to do that. 

As a matter of fact, the district court overturned a decision of the 

SEC, saying that the SEC did not follow the proper cost-benefit 

procedure. 

Mr. JOHNSON. In that case, I think President Obama and President Clinton got it wrong along the terms that you specified. I don’t 

think the court should have that ability to trip you up on these 

technical details. 

Mr. GARRETT. It is interesting that, once again, I have to be here 

and to be a defender of President Clinton and a defender of President Obama. 

But if that is my role, then I am willing to do it in this one regard, because I think the American public does have a right to 

have a balance done on the benefits of the cost and the analysis. 

Let’s get to the issue of transparency in only 36 seconds. 

Dr. Calabria, in your testimony, you write that the independence 

of the Fed has been greatly eroded by the revolving door between 

the Federal Reserve and economic policymakers in the Executive 

Branch. 

All of our discussion so far has been about how much overt influence that we are going to have, as Members of Congress? Could 

you talk about how much overt influence the Executive Branch 

has? 

Mr. CALABRIA. Let’s start for—either—so look at the current 

Board. Three out of five members of the current Board worked at 

33 

the Clinton White House, not the Clinton Administration, the Clinton White House. So if you want an apolitical Fed, this is not it. 

As I suggest in my testimony—and I think this is applied across 

any Administration—no one should be eligible to be a Fed Board 

Member for at least 4 years after they have left an Executive 

Branch appointment. There is really just too much of a revolving 

door between Wall Street, Treasury, and the Fed. 

Mr. GARRETT. Thank you. 

I see my time has expired. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. Foster, for 5 minutes. 

Mr. FOSTER. Thank you. 

Dr. Taylor, 31⁄2 years ago you were a coauthor of an open letter 

to Chairman Bernanke, basically criticizing his decision to do the 

large-scale assert purchases and predicting, among other things, 

currency debasement and inflation. 

We have been hearing that consistently over the last 31⁄2 years 

from Members across the aisle—my colleagues across the aisle. 

And I was wondering if each of you could, in one or two sentences, explain why those predictions have been so wrong for so 

long. And try to limit it to two sentences so we can— 

Mr. TAYLOR. My criticism of the quantitative easing and related 

activities had two risks. 

One, it was a downside risk, the uncertainty that it caused, the 

fact it could—unwinding would be uncertain, which was a negative, 

and the other is the other side, that it could be inflationary. 

What I think we have seen is the first risk. The economy has not 

performed very well. It has been disappointing by every measure 

until very recently, and that is not good. 

Mr. FOSTER. That is not— 

Mr. TAYLOR. That is the reason why the inflation rate has been 

so tame. It is a very weak economy. 

But we still—just to finish the answer, we still risk inflation if 

the Fed is unable to unwind. Lots of people out there are saying 

they are behind the curve already. It is still a risk. 

And I say that letter, which I signed onto, raised a lot of issues 

about the dangers of these kinds of policies, and I think, to some— 

to a great deal, that those dangers have been realized. 

Mr. FOSTER. But not inflation, you would agree. 

Mr. TAYLOR. Well, look. You have an unusual policy which creates many kinds of risks. Probably the greatest concern is the slow 

economy and the fact that unemployment took so long to get down. 

That is, to me, a tragedy. We not only had a deep recession, we 

have had an abysmally slow recovery. I don’t think that is a good 

reflection on that policy. 

Mr. FOSTER. It is a question of what the alternatives are. If you 

believe that doing something that would increase the output cap 

would actually have made the economy healthier, then that is a 

discussion that probably is also worth having. 

Next, Dr. Calabria? 

Mr. CALABRIA. First of all, I would say I am not only concerned 

about certainly headline inflation, I am concerned about asset 

34 

prices. It is very unusual to have a financial crisis without some 

sort of run-up in asset prices. 

We could have had—you and I would have had the same conversation 10 years ago, and we would missed the financial crisis, 

we would have missed the housing bubble. So, quite frankly, I do 

think we need to be worried about asset prices. 

I also think we need to be worried about the Fed paying interest 

on reserves for years has been contractionary. Why are we paying 

banks to have trillions of dollars sitting on the sidelines doing 

nothing? 

So I do think that sometimes the conversations sound like the 

Fed is either purely expansionary or purely contractionary. I think 

the Fed is a bit schizophrenic right now, quite frankly. 

I think they are doing things that are contractionary. I think 

they are doing things that are expansionary. And the net effect has 

been a mixed one. So, certainly, I just don’t think they have had 

a consistent set of policies and certainly I am— 

Mr. FOSTER. I am trying to count sentences here. 

Mr. CALABRIA. Okay. Well— 

Mr. FOSTER. No. I understand. 

Mr. CALABRIA. As you know, the two-hand economist bit with 

Truman. So that is the same here, one hand or the other. 

Mr. FOSTER. Okay. 

Ms. Peirce? 

Ms. PEIRCE. Just with the caveat that I am not an economist, I 

am concerned about the Fed’s policies, buying mortgage-backed securities, for example—they are having a big impact on the market—and then something that Mr. Campbell alluded to earlier, 

which is that watching the markets react to whatever the Fed says 

is pretty disturbing. I think it would be much better if the market 

were reacting to the market. 

Mr. FOSTER. All right. 

Dr. Johnson? 

Mr. JOHNSON. Mr. Foster, good question. 

I think this quantitative easing was risky. It certainly has not 

produced inflation. There were legitimate concerns about that, but 

it hasn’t. 

It also hasn’t miraculously pulled us out of this hole created by 

the massive financial crisis. I think there is a limit to the magic 

that central banks can work in this kind of situation. 

I do think, though, the question is a good one because, imagine, 

under the proposed legislation, you are going to be having hearings 

on a weekly or at least monthly basis all along exactly these lines 

with teams of experts like this all disagreeing. You all are going 

to be disagreeing. Some of you are expert. Some of you are perhaps 

less expert. 

This is not particularly going to be helpful to the Federal Reserve 

trying to do its job. You should be asking questions about who gets 

appointed to the Federal Reserve, what are their qualifications. 

I don’t have a problem with Mr. Calabria’s suggestion that you 

can’t put people on the Fed who have been working in the Executive Branch. I think that would rule out McChesney, Martin, 

Burns, Volcker, and Greenspan, but, of the current Board, only 

Lael Brainard, I think. So those are legitimate questions. 

35 

Mr. FOSTER. In my 25 seconds left, if I could just have a quick 

‘‘yes’’ or ‘‘no?’’ 

Do you think that the Federal Reserve should have a larger role 

and a larger part of its thought process in trying to limit asset 

price bubbles, in particular, real estate? 

You can see other countries have done this with some success. 

And do you think that should be an increased part of their portfolio 

or not, which is—I know. 

Mr. TAYLOR. I think that the first thing the Fed can do about 

asset bubbles is to have a policy of interest rates, a monetary policy 

that doesn’t bring them on. I really mean that. 

Mr. FOSTER. Okay. 

Mr. TAYLOR. A lot of the actions that have been taken recently 

by countries on—that have focused, say, on bubbles and housing 

have been because their interest rates are low. 

Take Switzerland. If they have a low interest rate, they attack 

the housing market with other mechanisms. Take Singapore. They 

have the zero rate because the Fed has a zero rate. They have to 

take special actions to contain the bubble in their housing and 

automobile markets. 

So, they are kind of responding to the fact that monetary policy 

is stuck and not doing its usual thing. And I think the first thing 

to do is to make sure the central banks, our central bank in particular, don’t cause the bubbles and then worry about what to do 

with it. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Neugebauer, chairman of our Housing and Insurance Subcommittee. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. Thank you for 

holding this hearing. 

And I thank our panelists for being here. 

I really want to talk about Section 9 of the FRAT Act, which 

talks about international negotiations. One of the things that—this 

committee has had a number of oversight hearings basically on the 

negotiations that are going on at FSOC and then, also, the discussions that are going on with the Financial Stability Board. 

As you know, in 2008, the G20 tasked the Financial Stability 

Board to come up with reforms for the financial system across the 

Board internationally. And since then, it has been kind of interesting. 

Initially, the Financial Stability Board put a number of insurance companies and financial institutions, SIFIs, and subsequent to 

that, the FSOC made AIG and then Prudential as SIFIs. 

And so the question that arises is because of the fact that the 

SEC and the Fed and the Treasury are all participants in the Financial Stability Board. 

And so, if they are over there in those negotiations and they vote 

then in those discussions to make these financial institutions financially significant institutions and then they come back, can they 

have a fresh—do they have a fresh start then to determine from 

an FSOC standpoint whether they are going to be determined to 

be SIFIs? 

And my question is—Scholar Peter Wallison with AEI said something that is inconceivable, that these designations of these three 

36 

insurers would have gotten through a Financial Stability Board 

without express approval of the Fed and the Treasury. 

So is that distorting the procedure that they are over there voting at the Financial Stability Board and then they are coming back 

and saying, ‘‘Okay. We are going to start over with a fresh piece 

of paper here and make our own determination’’ or is the Financial 

Stability Board basically making these decisions and are the Fed 

and the Treasury complicit to that? 

Dr. Taylor, do you have an opinion on that? 

Mr. TAYLOR. I don’t know the specifics of your question, but I do 

know quite a bit about negotiating because I was the Under Secretary of the Treasury for International Affairs for 4-plus years. 

My sense is there is frequently negotiating within the government and then there is negotiating between governments. And the 

within government, I think as much as possible, should take the 

Congress into account. It doesn’t always do that. 

I remember having former Chairman Barney Frank out to lunch 

at the Treasury to explain various things that we were working on 

at the time. I think that was essential. 

And so I think, when you think about this legislation, the word 

‘‘negotiation,’’ you have to think about what that means and, I 

think, try to explain it more. But I think, in the case you are talking about, it would be one where there should be better consultation in the first place. 

But you are always going to have different opinions at different 

agencies. Some may be more worried about the economics. Some 

may be more worried about the security. Some may be more worried about U.S. competition, the competitiveness. 

And they are going to figure out the best way and then approach 

the other government, which also has the different agencies. So, it 

is a complicated process. 

I think the intent of the proposed legislation is fine. But I think 

the word ‘‘negotiation’’ needs some more specificity. 

Mr. NEUGEBAUER. And I think one of the things that a lot of people feel like and the reason to have more transparency and disclosure here about what is going in these negotiations is because, basically, it appears that those negotiations are ending up setting policy in our own country, and I think that there is a concern about 

that. 

And so, much like if we are negotiating treaties between other 

countries, basically, we are in some ways negotiating treaties between financial institutions. 

Dr. Calabria, do you want to—you seem to want to engage in 

this. 

Mr. CALABRIA. I certainly share that concern. Let me make a 

broader point about much of this, and this applies to the cost-benefit, this applies to the negotiation. 

Congress can decide all this stuff if it wants. Remember, within 

Dodd-Frank, we decided that bank holding companies—there is no 

negotiation there. Boom. You are in. You could have decided that. 

The Congress could have set up other parameters. 

So any of these efforts—to me, part of the problem is that DoddFrank has 400-some rulemakings. There is just so much delegation, 

so much discretion in the regulatory process, that I think some of 

37 

these hard choices actually have to be made up here rather than 

by the regulators. But I certainly do agree. 

I worry that the FSOC, the SIFI process, that—in my opinion, 

we are essentially signaling to the market that the entities are toobig-to-fail. I worry that is committing the Fed to assisting those entities. So I certainly think that needs to be a more transparent 

process. 

Mr. NEUGEBAUER. I see my time has expired 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from California, Mr. Sherman, for 5 minutes. 

Mr. SHERMAN. I agree with Dr. Calabria that Dodd-Frank basically just transferred all this power to the Executive Branch. It 

took us 2,000 pages to just say, ‘‘Executive Branch, don’t let it happen again, and here are all the hammers to use to make that happen. Hit whoever ought to be hit.’’ But all too often we either do 

nothing or we can’t agree on what to do. So we just empower the 

Executive Branch. 

I don’t always agree with the Fed. They haven’t focused on the 

trade deficit. Of course, virtually no one in Washington talks about 

the trade deficit. And they haven’t agreed with Bernie Sanders and 

I that too-big-to-fail is too-big-to-exist. But very few people in 

Washington agree with Bernie Sanders and I on that point. 

But the Fed has done more than any other institution to pull us 

out of the Great Recession. They have not debased our currency. 

It is, if anything, as shown by the inflation rate, the Cost of Living 

Index, as valuable as anyone would have predicted that it would 

be in 2014. 

We have had a slow recovery, but we had a national financial 

meltdown. And when that happens, you expect a slow recovery, but 

I don’t think you blame the slow recovery on Fed policy. Their low 

interest rates are the only thing of any policy that I can point to 

in the last several years that have pulled us out of this recession. 

And we should approach things with a degree of humility because I don’t think there is anybody in this room who can wave 

around a brokerage receipt showing that they were selling Countrywide short in early 2008. 

If anybody really knew and was ready to bet the farm that 2008 

would have happened, the least they could do is give me a ride on 

their private jet, subject to Ethics Committee approval. 

The gentleman from New Jersey says that cost-benefit analysis 

was endorsed by President Clinton and President Obama. 

I do think I need to point out for the record that they never supported a cost-benefit analysis for Fed monetary policy decisions because everything they do is a cost-benefit analysis. 

It isn’t trying to weigh debts from pollution to effects on the 

economy. Everything they do is to focus on the national economy. 

There are various cosponsors of the FRAT Act. Presidents Clinton 

and Obama should not be listed. 

Dr. Calabria, you have suggested that we not allow people who 

have served in the Executive Branch within the last 5 years to 

serve on the Fed. 

Mr. CALABRIA. Four years. That’s— 

Mr. SHERMAN. Should we have the same rule for those who have 

worked on Wall Street? 

38 

Mr. CALABRIA. In terms of people from Wall Street working at 

the Fed? 

Mr. SHERMAN. Yes. 

Mr. CALABRIA. Yes. I would be fine with a 4-year restriction. I 

think that is a reasonable span. 

Let me say just as an aside— 

Mr. SHERMAN. So we would have just academics on the Fed— 

Mr. CALABRIA. No. Because— 

Mr. SHERMAN. —having excluded—and former Members of Congress. 

Mr. CALABRIA. If I could channel Section 10— 

Mr. SHERMAN. Two of the least— 

Mr. CALABRIA. If I can channel Section 10 of the Federal Reserve 

Act for a second, it does say, ‘‘due representation to agriculture, 

commerce, and industry.’’ 

So it actually—the Federal Reserve Act, as structured, suggests 

that we should have people—not just academics, not just bankers. 

Mr. SHERMAN. I would point out there are two major problems 

with the structure of the Fed. 

First, it is undemocratic. You have governmental power in the 

hands of those elected by bankers. And second, it discriminates 

against the western half of the country. 

Certainly, if you have the San Francisco Fed representing 3 or 

4 times as many people as the New York Fed, the least you could 

do is give the San Francisco Fed a permanent seat on the Open 

Market Committee, but—and perhaps I could work with the gentleman from New Jersey to correct those two problems. 

Mr. Calabria? 

Mr. CALABRIA. I suggest in my testimony that Section 10 of the 

Federal Reserve Act also requires that no two Members of the 

Board can be from the same Federal Reserve district. 

We have repeatedly violated that. I would go as far to say that, 

with the current makeup of the Board and you count the New 

York, that the New York district has 6 votes on the FMO— 

Mr. SHERMAN. And the Board that represents 3 or 4 times as 

many people as any other Board has either one or zero and no assurance of even one. 

Finally, there is this idea, Dr. Johnson, that we could write a 

rule and then put monetary policy on automatic pilot if we just 

wrote a good rule. Is that possible? 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair will now recognize the gentleman from Missouri, Mr. 

Luetkemeyer, the vice chairman of our Housing and Insurance 

Subcommittee, for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

I want to go to the section that deals with the stress tests of the 

banks, and this really concerns me. I know that Sheila Bair wrote 

an op-ed back in April 2013, and the headline was, ‘‘Regulators Let 

Big Banks Look Safer Than They Are.’’ 

And in there she makes the comment that, ‘‘The ease with which 

models can be manipulated results in wildly divergent riskweightings among banks with similar portfolios. Ironically, the government permits a bank to use its own internal models to help determine the riskiness of assets, such as securities derivatives, 

39 

which are held for trading—but not to determine the riskiness of 

good old-fashioned loans. The risk weights of loans are determined 

by regulation and are generally subject to tougher capital treatment. As a result, financial institutions with large trading books 

can have less capital and still report higher capital ratios than traditional banks whose portfolios consist primarily of loans.’’ 

And she goes on to give an example of a big bank that has 14 

percent capital, yet, if you take the risk-weighting out, it goes down 

to 7 percent, and then a big regional bank that is risk-weighted at 

9 percent, and if you take the risk-weighting out, it stays almost 

the same. 

So we are playing on two different fields here. And I think this 

part of the bill is extremely important from the standpoint of how 

you begin to, I think, get some of these big banks under control. 

If you let them write their own stress test, if you let them write 

their own rules for how they exist, how in the world can we actually find a way to regulate those? 

And, Dr. Calabria, I know you mention this in your testimony. 

Can you— 

Mr. CALABRIA. I want to repeat something that Professor Johnson said, which is that the stress tests are gamed. And maybe we 

will agree or disagree on this, but I think they are always going 

to be gamed. 

I think the Basel Capital Accords have been gamed. I think you 

see these herding into low-risk assets. Let’s not forget the experts 

told us that Greek debt was risk-free ahead of the crisis. I think 

that was obviously not the case. 

I really think we should abandon the stress test, abandon the 

Basel Capital Accords, and go to a flat, clear leverage ratio. And 

I think that is far more simplistic and far more transparent. 

Mr. LUETKEMEYER. Okay. You don’t believe that the weighting of 

the riskiness of the assets is something— 

Mr. CALABRIA. There is always— 

Mr. LUETKEMEYER. —that should be taken into consideration 

here? 

Mr. CALABRIA. There is always going to be that issue. But I have 

yet to know of a financial crisis caused by small-business lending. 

Yet, we know that small business is risky. We also know that the 

Basel Capital Accords and the stress test dissuade banks from 

doing small-business lending. 

I think it is far more important to have a diversity of portfolios, 

which, to me, the stress test and the capital accords encourage homogeneity in a way that, to me, becomes systemic. 

Mr. LUETKEMEYER. Okay. Along that line, what this bill does, 

though, is increase the transparency of those tests so at least the 

general public— 

Mr. CALABRIA. It is a small step in the right direction. 

Mr. LUETKEMEYER. Okay. That is where I was trying to go. 

Yes, Dr. Johnson? 

Mr. JOHNSON. Unless— 

Mr. LUETKEMEYER. You talk faster than I think. So, can you slow 

down? 

Mr. JOHNSON. Okay. I am sensitive that you have limited time. 

40 

I and Mr. Calabria agree on the capital part, and I think we are 

agreeing with you. And I think you are making a very important 

point, which is we should be putting more emphasis on leverage 

ratio, which is assessment of capital without these funky risk 

weights and less emphasis on the risk-weighted—I am not saying 

zero, but less emphasis. 

Mr. LUETKEMEYER. Right. 

Mr. JOHNSON. I think we completely agree on that. 

I think you are also right and Sheila Bair is right to have concerns about anything that allows the banks to use their own models because they put all kinds of crazy stuff in that and it is not 

subject to very good supervision. 

On the stress test proposal in this legislation, I am afraid I disagree with Mr. Calabria. I think it is a small step in the wrong direction. I think you are making it easier for the banks to game the 

stress test. 

I agree the stress tests are not— 

Mr. LUETKEMEYER. You don’t believe the transparency helps in 

this regard? That is basically what this does here. 

Mr. JOHNSON. What you have right now, Congressman, is you 

have transparency on the criteria of the stress test, how stressed, 

what is going to go wrong in the stress scenario. 

What the banks want to see is the details of the models the Fed 

is using. Once they have those models and they run those models 

in their own computers, they can game them just like they game 

their own models. That is what you don’t want. 

We are agreeing on the capital, though, and I agree with what 

you said in the beginning: Capital is the most important thing. 

Capital should be front and center. And capital, without the funky 

risks weights, is the way to go. 

Mr. LUETKEMEYER. Okay. So how would you structure that, 

then? 

Dr. Calabria, you just indicated you just have a— 

Mr. CALABRIA. I was going to say we do agree that it is a small 

step. The direction we might disagree on. 

But again, I do think that getting more of the assumptions out 

there and the parameters—and I would agree. I think internal risk 

models are fine for the banks, but you can’t use them for regulatory 

purposes. And I think that has to be the question here. 

Mr. LUETKEMEYER. This really concerns me because I think what 

we are doing is we are giving the general public a level of safety 

here— 

Mr. CALABRIA. False confidence, a level of confidence that the 

system is going fine, everything is good. 

But when you look at what is really happening here, they are 

gaming the system, and I think it is really unfortunate because I 

don’t think the American public has the true picture. 

Mr. LUETKEMEYER. With that, I yield back. Thank you, Mr. 

Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

I now recognize the gentleman from California briefly for a unanimous consent request. 

Mr. SHERMAN. I ask unanimous consent to put in the record Executive Order 12866 and Section 10 thereof— 

41 

Chairman HENSARLING. Without objection. 

Mr. SHERMAN. —which states that— 

Chairman HENSARLING. Without— 

Mr. SHERMAN. —no judicial— 

Chairman HENSARLING. Without objection. 

Mr. SHERMAN. —no judicial review is allowed— 

Chairman HENSARLING. The— 

Mr. SHERMAN. —with this Executive Order. 

Chairman HENSARLING. For the unanimous consent decree, not 

for the pontification. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Washington, Mr. Heck, for 5 minutes. 

Mr. HECK. Thank you, Mr. Chairman. 

And thanks to all the witnesses for giving of your time today. 

Dr. Johnson, I note with some interest that the proposed legislation effectively reasserts the dual mission of the Fed—namely, 

bringing about price stability and optimal employment levels. I am 

wondering, frankly, if that would be its practical effect. 

I am looking back over the last 4 years as an example and have 

seen where, inarguably, the Fed’s policies have contributed to a decline in the unemployment rate from 9 to 6 percent, and noted with 

interest, as revealed I think in Congresswoman Capito’s question, 

application of this legislation would have inarguably increased interest rates over that same 4-year period of time. 

What is your analysis as to what would have occurred, unemployment-level-wise, had there been higher interest rates? 

Mr. JOHNSON. If the Fed hadn’t taken the broad set of extraordinary measures that they embarked on in 2008, including lowering interest rates and also buying assets in a way that was at 

that point considered unconventional and affecting different kinds 

of interest rates, other than the short-term traditional policy rate, 

then the recession would have been deeper and unemployment 

would have stayed higher for longer and the recovery would have 

been slower. 

I think that is, unfortunately, what would have happened and 

what would happen in a future crisis if it is the case, as I believe 

it is, that this legislation would effectively limit the ability of the 

Fed to respond fully. 

Mr. HECK. So, confirming my worst fear and suspicion that it 

would have increased unemployment, notwithstanding the fact that 

it reasserts that dual mission. 

There are actually other bills before the Congress that have been 

proposed that would have eliminated the secondary mission of optimal employment levels, which is something like a 40-year-old law 

on the books passed by the then-House Banking Committee overwhelmingly, with 3 dissenting votes in the United States House of 

Representatives. It was a bipartisan bill to set the second mission 

of optimal employment. 

If we were to remove the optimal-employment mission from the 

Fed and if they were, in fact—if it were, in fact, to focus exclusively 

on price stability, what is your opinion and analysis as to how that 

would play out, if they were, in effect, not allowed to consider unemployment levels but only price stability? 

42 

Mr. JOHNSON. It depends on how they would interpret that. And 

there are some central banks around the world, for example, the 

European Central Bank, that does focus, by law, exclusively on 

price stability. 

I think you would have less response in the case of these big 

downturns, certainly the financial-crisis-type situations. I don’t 

think the Fed would embark on the same sort of creative, unconventional policies. I don’t think you would have the same kind of 

interest rate cuts. And I think you would have higher unemployment in those situations. 

Mr. HECK. So last question, if I may: Various members of this 

committee tend to focus on those two issues and economic indicators: price stability; and employment levels. I like them, too. But 

for the last couple of years, I have frankly been kind of fascinated 

by the output gap as an indicator. In fact, while I clearly have a 

problem with how it is applied in this instance, I think the fact 

that the output gap is a part of this formula is interesting. 

And I am wondering, from your perspective, as somebody who 

doesn’t like the approach taken in this bill, is there a way—are 

there policy approaches that we could take that would utilize to a 

greater degree the output gap as a means of driving policy? 

And just to remind everybody, that is the difference between actual and potential, which is essentially a no-cost deficit to be made 

up in terms of the strength of the economic output, if I can use lay 

terms to describe it. 

Mr. JOHNSON. It is a good question and a completely accurate 

formulation. 

Look, the experts disagree a lot about this, about precisely how 

big is the output gap. You have to take a view on what has happened to labor force participation, as I am sure you are well aware, 

Congressman. 

And I think this is a perfect example of why you need to delegate 

decision-making to the Federal Reserve. I don’t think a legislative 

body or a committee hearing like this produces an operational answer that stands up over time. I think you need to put the right 

people on your decision-making Board—the FOMC, in this case. 

They need to have this argument. They need to have a large staff 

of experts, as Chairman Hensarling has said, who need to be welltrained in a wide range of economic methodologies. And they need 

to hammer it out. And then they need to be held accountable, as 

they are in their regular hearings with you. That is the way to get 

at a question like that. 

Mr. HECK. Thank you, sir. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Ohio, Mr. Stivers. 

Mr. STIVERS. Thank you, Mr. Chairman. I appreciate your time. 

I want to thank the witnesses for being here and for your testimony. 

And, first, I want to give Dr. Taylor a chance to correct the 

record on the comments of the gentleman from California, who, I 

believe, a few minutes ago said that Section 7 of the bill, the costbenefit analysis section, would require the Federal Open Market 

Committee to perform cost-benefit analysis on monetary policy. 

43 

And I would direct Dr. Taylor to page 15, line 8, which says, ‘‘Before issuing any regulation,’’. Does that mean they would have to 

consider a cost-benefit analysis on monetary policy? 

Mr. TAYLOR. This is pretty clearly addressed to regulatory policy, 

in my view. 

And, quite frankly, this discussion about cost-benefit analysis is 

amazing to me. It is sort of the basic thing you teach students 

about government policy. You have to pass a cost-benefit test. And, 

yes, it is hard; yes, it is difficult; but why would you just abandon 

it? It makes no sense to me, really. 

Mr. STIVERS. Thank you. And that is the way I read it, too. But 

the way I read Obamacare, it was bad, too, so maybe different people read it differently. 

But I appreciate that clarification, because I think that is really 

important to note. It is about the regulatory authority, and the 

Federal Reserve is a giant regulator in addition to the monetary 

policy that they pass. So I think that is really important on the 

cost-benefit analysis. 

And, in fact, the President has an Executive Order on cost-benefit analysis that he signed; it just can’t apply to independent agencies like the Federal Reserve. Therefore, an Act like this is very important. So I want to thank Mr. Huizenga and the gentleman from 

New Jersey for their work on it. 

Second, I guess, on Section 5—and I will open this up to the entire panel—is there anyone who believes that a quarterly testimony 

of the Federal Reserve before Congress is overly burdensome on the 

Federal Reserve? 

So there is one—I will take that as three people do not think it 

is overly burdensome and one person does. 

I would just say, if we are going to have transparency in this 

country, having somebody be here for a few minutes every 90 days 

is not too much to ask. Transparency is really important, and I 

think this can really help. 

I think there has been a lot of conversation already from previous questions on Section 2 of the bill that deals with moving to 

a more rule-based system. 

I think I would like to ask Dr. Taylor if he remembers or wants 

to talk about the day when Chairman Bernanke said we might just 

stop quantitative easing and what happened to the markets? Do 

you remember what happened that morning? 

Mr. TAYLOR. Yes. It was in the Joint Economic Committee, I believe. He said, maybe in the next few meetings there will be a decision and that they—sometimes called a ‘‘taper tantrum.’’ And it did 

cause a lot of volatility, to be sure. 

In fact, Quantitative Easing 3, it started when the long-term 

Treasury, 10-year Treasury was 1.7, and when he stopped talking, 

it was 2.7. So it is hard to see how that had a positive effect on 

lower rates. 

Mr. STIVERS. Right. 

Mr. TAYLOR. There are a lot of mistaken views about this. For 

one, I would just say the notion that unemployment would be higher if this legislation was passed, I believe that is completely wrong. 

You wouldn’t have had nearly the crisis that you had, I believe, or 

the recession. 

44 

And that is what is, to me, a tragedy, that we went through all 

this and it has been a slow recovery. And, there isn’t any data that 

say recoveries have to be slow after deep recessions. That is not 

American history. We have faster recoveries after deep recessions 

in this country. This is the most unusual slow recovery from a deep 

recession that we have ever had in our history that we can record. 

So, those are the facts. 

Mr. STIVERS. Thank you. 

I would like to give Dr. Calabria and Ms. Peirce a chance to talk 

about Section 9, really quickly. Section 9 deals with transparency 

on international negotiations. 

And as international harmonization becomes a bigger issue, don’t 

you think the American public deserves to know the positions that 

their regulators are taking on their behalf in these international 

negotiations? 

Either one of you? 

Ms. PEIRCE. I certainly think that is important, given the role 

that the international negotiations are playing in determining what 

is happening here domestically. Obviously, you can define negotiations so that normal conversations can happen between regulators, 

but for the major issues, there should be some input from the public here before positions are taken abroad. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from South Carolina, 

Mr. Mulvaney. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

A couple of different things: Mr. Johnson, before I get on to the 

questions that I wanted to ask, you mentioned something that 

caught my attention, several questioners back, regarding some 

comments that Mr. John Allison at the Cato Institute, formerly of 

BB&T, had made regarding suggestions he had on raising capital 

requirements to roughly 20 percent. 

In my conversations with him on the same topic, he mentioned 

the same thing to me. But were you aware or was it your understanding, as it was mine in my conversations with Mr. Allison, that 

was part of a larger proposal, that it would allow an alternative 

system, that banks could opt out of Dodd-Frank, opt out of the 

oversight that they have today, the regulatory climate that they 

have, and opt into a new parallel system, where the primary, if not 

the only, requirement was this 20-percent capital requirement? 

Was that your understanding, sir? 

Mr. JOHNSON. I think I should let Mr. Calabria answer that. I 

just read one article. I didn’t get that impression from the article. 

I would defer to Mr. Calabria. 

Mr. CALABRIA. That is correct. It is not an add-on to the existing 

system. It is a much newer, simpler, and what I believe would be 

a safer system. 

Mr. MULVANEY. Yes. 

And I won’t ask you, Mr. Johnson, if you are not that familiar 

with it, what your opinion is of it, but it might be interesting to 

have that conversation at some future hearing, about whether or 

not the idea of a parallel system—you can either maintain your 

lower capital requirements and operate within the existing system 

or opt into a parallel system that has a much more limited reguVerDate Nov 24 2008 13:44 Mar 27, 2015 Jkt 091153 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\91153.TXT TERRI
45 

latory climate but a much larger capital requirement. We will deal 

with that another time. 

Dr. Taylor, over the course of the last 2 years here, I have had 

a chance to talk to both Chairman Bernanke and then subsequently his successor, Chair Yellen, regarding the monetary tools 

that might be available and might not be available to the Fed as 

they go forward in an era of rising-interest-rates environments. 

And the conversation we have usually focuses on the difficulties 

they might have in absorbing huge balance sheet losses if they 

have to sell securities. 

And the answer I got in response to that inquiry from both 

Chairman Bernanke and Chair Yellen was that the Fed could avoid 

having to book these losses by participating in the repo market. 

Subsequent to the first conversations we had in this committee 

about that, the Fed actually did it, or at least started that. Last 

September, they created the overnight reverse repurchase facility. 

This committee received a letter last week, on June 30th, from 

Ms. Sheila Bair, the former head of the FDIC. I ask unanimous 

consent to place it in the record. 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. MULVANEY. And she has concerns about it, a lot of different 

concerns about it, not the least of which is whether or not it would 

essentially force short-term investors to reallocate their investment 

dollars given the presence of this new super safe investment. 

Would the Fed go from essentially being the lender of last resort 

to the borrower of first resort? 

The size of this market has grown very dramatically, very quickly. And in the 2 minutes I have left, Dr. Taylor, I would ask you 

if you have an opinion on whether or not the Fed should be doing 

this and whether the Fed should be coming to Congress to ask for 

the ability to do this? 

Mr. TAYLOR. My view is, as long as its balance sheet is so large 

that they have to do something when they want to raise interest 

rates, they are perfectly capable of raising interest on reserves for 

this interval, and I think that would be fine. 

They are doing these other things because during the panic, they 

saw that the Federal funds rate actually went below the interest 

on reserves. And so, they are concerned that they need to do both 

of these things, reverse repos and interest on reserves. 

But my main concern about either of these is it leads to a situation where the balance sheet may be permanently high, basically 

forever, call it ‘‘QE Forever,’’ and the interest rate will be moved 

around either by reverse repo or interest on reserves. I think that 

is quite problematic. 

I would like to see the Fed return to a situation where the supply 

and demand for reserves determines that short-term interest rate. 

Then, you wouldn’t have all the quantitative-easing possibilities 

that you have currently. And, of course, to move there more quickly, it would mean they may have to sell off some of this large balance sheet. And I think if they do that in a strategic, clear way, 

like the second part of tapering has been, I think it wouldn’t be a 

problem for the markets. 

So I have a lot of concerns with this policy, where they are going 

to go, because frequently in policy, in my experience, you start out 

46 

with something temporary, like temporary, 3 or 4 or 5 years, with 

this balance sheet so big, and it becomes a permanent one. And it 

is a real concern to me that the future will be ‘‘QE Forever.’’ 

Mr. MULVANEY. Dr. Calabria, you look like you have some 

thoughts. 

Mr. CALABRIA. I was just going to say that I very much agree. 

I think the Fed is going to have to look at some ways to get out 

of this, and I think they need some flexibility in that. 

And the broader point should have been they—I think they need 

to remember why central banks generally stay out of the long end 

of the yield curve to begin with. But you are in this mess now. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger, for 5 minutes. 

Would the gentleman yield to the Chair briefly? 

Mr. PITTENGER. Yes, sir. 

Chairman HENSARLING. It has come up a couple of times—I believe one member of the panel has said it is overly burdensome for 

the Fed Chair to meet with Congress on a quarterly basis. It has 

been well-established in the press that the Fed Chair meets with 

the Secretary of the Treasury on a weekly basis. 

Is there any member of the panel who believes it is more burdensome to meet with Congress on a quarterly basis than with the Executive Branch on a weekly basis? Please raise your hand. 

I see one. 

I yield back to the gentleman from North Carolina. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

Dr. Taylor, it often seems that anytime the Congress is contemplating an amendment to the Federal Reserve Act regarding the 

Fed’s monetary policy requirements, we get a knee-jerk response 

that it will threaten the Fed’s independence. 

Do you feel that this is the case at this time? 

Mr. TAYLOR. I think the legislation is crafted very well to prevent 

that. And, indeed, the Fed chooses its own policy role, and so it has 

the operational independence that it needs. I think that you need 

to go beyond the independence, and that is why I think this legislation is so valuable. 

Mr. PITTENGER. Thank you. 

Ms. Peirce, do you believe that putting the economic analysis requirement into the statute, like we have at the SEC and the CFTC, 

can have a beneficial effect on the rulemaking process and result 

in sounder regulatory outcomes? 

Ms. PEIRCE. Absolutely. I think that the SEC has been through 

its own process of first ignoring its requirement, then being reminded that it should adhere to that, and then starting to employ 

that. And I think we are gradually seeing improved rules as a result and more deliberate rulemaking. And that is definitely needed 

at the Fed. 

Mr. PITTENGER. Thank you. 

The SEC has rules in place to ensure its employees and officials 

do not trade on information they learn on the job and requires 

them to disclose their financial investments. 

47 

Do you believe that the Federal Reserve should be exempt from 

these requirements, despite the fact that the Fed employees have 

access to sensitive, potentially market-moving information? 

We will start with you, Mr. Johnson. 

Mr. JOHNSON. Congressman, I had a chance to review the rules, 

the detailed rules, and I think the Fed circulated them more broadly, comparing the restrictions on their staff with the restrictions on 

the SEC. The wording is slightly different because they have, obviously, different jurisdictions, but it seemed to me to be almost exactly parallel in terms of what they can and cannot do. 

And so I didn’t understand that part of the legislation. I don’t 

understand the problem that you are trying to fix there, because 

it seems like the Fed does have exactly the right kind of rules already. But tell me what I am missing. 

Mr. PITTENGER. Mr. Calabria, would you like to respond to that? 

Mr. CALABRIA. It seems like what you are simply doing is putting 

current Fed practice into statute. And that is great that they are 

doing it now, but there is no guarantee they will continue to do it. 

So I don’t see much harm—again, maybe I should use the phrase 

‘‘small step’’ here, because, again, it is a small step in the right direction. 

Mr. PITTENGER. Sure. 

Dr. Taylor? 

Mr. TAYLOR. I would agree with that. 

Mr. PITTENGER. Ms. Peirce, did you want to respond? 

Ms. PEIRCE. Yes. I just wanted to note that part of the problem 

is the Fed’s lack of transparency. And I think this illustrates that 

if they have great procedures they could tell Congress about them 

and get them baked into the bill. 

Mr. JOHNSON. They did tell you about them. I think those details 

have been available for a long time. I don’t understand what is the 

lack of transparency around these restrictions, these practices. I 

think they are available to Congress. I think they are available to 

the Chair of the committee any moment of any day that he wants 

to pick up the phone and call them. 

Ms. PEIRCE. Yes, I think the problem is that the Fed’s practice 

has been—and perhaps this is grounded in the fact that it was primarily established for monetary policy—to not be transparent. And 

so that is the pushback that Congress needs to give, because the 

Fed can’t—it is now a massive regulator, and it can’t hide behind 

the traditions it has built up in its monetary policy realm. 

Mr. PITTENGER. Thank you. 

Ms. Peirce, I would like to ask, the FRAT Act requires the Fed 

to provide metrics by which to gauge the success of a proposed rule, 

and requires the Fed to subsequently use those metrics to judge 

whether the rule has achieved its purpose. 

Do you believe that will help to ensure new rules accomplish 

their intended purpose? 

Ms. PEIRCE. I think that is a very important thing to do. It is 

important for the agency to set forth the metrics by which it will 

measure its own success and then a few years later to go back. 

Otherwise, what it will do is, when it does the retrospective review, 

it will just pick metrics that work well for it. So it facilitates an 

honest review. 

48 

Mr. PITTENGER. Dr. Calabria, did you want to—you seem like 

you have something on your mind. 

Mr. CALABRIA. I do think that is helpful. I would also add that 

I think that applies across-the-board. So my general suggestion 

would be that everything within this committee’s jurisdiction 

should be subject to a regular sunset so that you are forced to reevaluate it. 

Mr. PITTENGER. Thank you. 

I yield back my time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Pennsylvania, Mr. Rothfus. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Dr. Taylor, markets responded forcefully to one of the first 

FOMC meeting releases to be accompanied by a press conference 

last summer. This panicked response occurred despite Chairman 

Bernanke’s characterization of his comments as not substantially 

altering the FOMC’s policy stance. 

A recent survey of 55 economists by The Wall Street Journal 

gave the Fed a grade of D-minus for its guidance. 

Don’t these facts show that the Fed’s monetary policy guidance 

function needs more work? 

Mr. TAYLOR. I think so. I think the forward guidance as practiced 

has changed quite a bit; it has been erratic. 

I would go back to the point, if they had a policy rule, like this 

legislation is asking, that the forward guidance would just fall out 

automatically. There would not be much of a question about it. 

Mr. ROTHFUS. Yes. 

I would like to follow up on this distinction we have been talking 

a little bit about between the Fed’s role in setting monetary policy 

and the Fed’s separate role as a financial regulator. 

Dr. Calabria, we hear many times about the importance of the 

Fed’s independence. Does this argument about the Fed’s independence apply to the Fed’s regulatory responsibilities as well as its 

monetary policy responsibilities? 

Mr. CALABRIA. I don’t think it does. And as I alluded to in my 

testimony, I think the fact that the Fed does bank regulation undermines its ability to conduct independent monetary policy and 

certainly represents some conflicts of interest. 

The ‘‘Greenspan Put,’’ the ‘‘Bernanke Put,’’ and maybe pretty 

soon we will call it the ‘‘Yellen Put’’ came about because of the responsibility of the Fed feeling like they needed to rescue financial 

institutions every time there was a market hiccup. And I would 

certainly argue that some of the rescues, particularly of AIG, were 

done partly to cover up mistakes on the regulatory side that the 

New York Fed made. 

So, to me, I just think there is a real tension here in having this 

entity be a central bank and a financial regulator. 

Mr. ROTHFUS. As a financial regulator, should the Federal Reserve be any more independent of Congressional oversight than 

other financial regulators, such as the OCC or the FDIC? 

Mr. CALABRIA. No. 

Mr. ROTHFUS. Do any of the accountability and transparency provisions in this legislation threaten the Fed’s independence to set 

monetary policy? 

49 

Mr. CALABRIA. In my view, no. 

Mr. ROTHFUS. Okay. 

Mr. CALABRIA. Let me add, it is often—I think the traditional 

view has felt that if we give a regulator discretion, that entails 

independence. And I can certainly say, as having been a regulator 

for a short amount of time, you get all sorts of pressure, and it is 

much easier to be independent if you have a set of rules to hide 

behind so you can sit here and say, ‘‘Well, we would love to do that 

for you, but this is what the law actually says.’’ 

And so, we have certainly seen this. One of the reasons that the 

Volcker Rule has becomes so convoluted is because it wasn’t very 

clear to begin with. And so if you have a clear set of rules in statute, it is much easier for the regulator to defend that and stick 

with that than it is to compromise along the way. 

Mr. ROTHFUS. Ms. Peirce, does Fed independence in setting monetary policy mean the Fed’s financial regulations are above the 

law? 

Ms. PEIRCE. Absolutely not. I think it is very important that if 

the Fed is going to be a regulator, and I would agree with Dr. 

Calabria that it should not be, but if it is going to be a big regulator, it needs to be subject to the same accountability as other regulators. 

Mr. ROTHFUS. I would like to talk a little bit about the Fed’s 

stress-test program, Ms. Peirce. The Fed’s stress-test program attempts to gauge how bank balance sheets hold up in worst-case 

scenarios to ensure banks are prepared for periods of extended financial stress. 

But wouldn’t it be appropriate to also require the Fed to stresstest its own accommodative monetary policy? Specifically, shouldn’t 

the Fed be required to stress-test its exit strategy to its quantitative easing program to estimate the effect on the Fed’s ability 

to fulfill its mandate, the impact on the Fed’s balance sheet, the 

upper ranges of interest on excess reserves the Fed might be required to pay, and how increases in the Federal funds rate might 

impact the relationship between the government’s interest payments on Treasury obligations and the deficit? 

Ms. PEIRCE. I am going to defer to Dr. Taylor on that since I 

think he has a better sense of— 

Mr. TAYLOR. I think that the Fed should do all of those things. 

And the evidence that they put out now that quantitative easing 

worked, I think, is based on studies that just looked at the announcement effect. They are not that great; they are wrong, in my 

view. So I think, in some sense, the answer to your question is to 

have these studies be done, make them public, so we can question 

them and analyze them and have a better debate about it. 

I think when you say require them to do a specific kind of study 

or a specific kind of analysis, I would say that should come out of— 

Mr. ROTHFUS. I guess that leads to my other question. Should 

the Fed be subject to transparency requirements for its own stresstest models and results? 

Mr. TAYLOR. No, I think if this legislation is to work well, the 

Fed is going to make those things clear. That will be an example 

of a deviation from a policy rule, and so they are going to have to 

50 

explain why they did that. So I think it would come out of the testimony. 

I would hope that they would say, well, we are going to deviate 

because of X, and they will make it clear, their analysis. And you, 

being informed about it, will be able to question that, and it will 

be a public debate. 

So I very much feel that a lot of the things that they have done 

recently have not been productive. They have gone ahead with 

them, but they have been deviations from the kind of policy for 

which this legislation would ask. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr. 

Mr. BARR. Thank you, Mr. Chairman, for holding this very important hearing. 

And thank you to the panelists. 

It has been argued that there could not have been a housing bubble or the massive misinvestment in the housing market in the 

run-up to the financial crisis had the Fed not made the decision to 

expand the money supply to the extent that it did to finance the 

bubble in the run-up to the crisis. 

The proponents of this argument make the case that the fundamental cause of the crisis was mistakes by the Fed—in other 

words, that it would have been impossible for a misallocation or a 

misinvestment of this scale to have occurred without the monetary 

policies pursued by the Fed before 2008. 

Do the panelists agree that the Federal Reserve had a role to 

play in causing the financial crisis? And we will just go down the 

row. 

Mr. TAYLOR. Yes, I do. I think that was—I would characterize it 

as they held interest rates too low for too long in that period, and 

that caused excesses in the housing market, search for yield. 

I would say there are regulatory issues, as well. Rules on safety 

and soundness were not adhered to enough. So it is kind of breaking two kinds of rules that I think led to the crisis. 

Mr. BARR. Okay. 

Mr. CALABRIA. I would say, as well, that I absolutely think that 

monetary policy conducted about a decade ago, if you will, was a 

contributor of many. And to repeat what Dr. Taylor said, there certainly were other regulatory failings, some of those by the Federal 

Reserve, as well. For instance, to me, I think the Basel Capital Accords were a very big contributor to the crisis. 

But again, there is not a mono-causal definition of the crisis. To 

me, a dozen different explanations all had some bearing. But I absolutely do believe monetary policy was a very big contributor, that 

if we had followed something like the Taylor Rule, the boom size 

of the housing market would have been a lot smaller. 

Ms. PEIRCE. And just coming from my perspective, I would say 

that the Fed’s regulatory policy did play a role. And that is why 

it is so surprising that their regulatory powers were expanded in 

Dodd-Frank. 

Mr. JOHNSON. To answer your question, Congressman, monetary 

policy did contribute but in a relatively small way. The regulatory 

failures were much more profound. They were not just at the FedVerDate Nov 24 2008 13:44 Mar 27, 2015 Jkt 091153 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\91153.TXT TERRI
51 

eral Reserve; they were throughout the regulatory system. They 

were also on Capitol Hill. 

And to the point that has been made previously, central banks 

that did not have regulatory functions also struggled, and those 

economies also struggled, as in Britain, as in Europe, with similar 

problems. 

So the regulatory failure was not because of the regulations of 

the central bank. They were a much broader misunderstanding of 

what the system needed. 

Mr. BARR. Okay. 

And I think, Dr. Calabria, you answered this question in your 

initial—but the follow-up here is that to the extent monetary policy, not the regulatory side but monetary policy, was a contributing 

factor, was the Federal Reserve following a rule-based approach in 

conducting monetary policy in the years leading up to the financial 

crisis or following a more unpredictable model and an ad-hoc monetary policy? 

Mr. CALABRIA. I certainly think in the years 2003 to about 2005, 

2002 to 2005, there were large deviations from what would have 

been a rule, and monetary policy was certainly looser than it would 

have been otherwise. 

But, I do want to repeat what Professor Johnson said. Certainly, 

there were regulatory failings across the system, as well as, I spent 

my time up here, and I can certainly say there were failings up 

here. 

Mr. BARR. Professor Johnson made the argument that the legislation before this committee is monetary policy by Spanish Inquisition, that the legislation would produce volatility as opposed to prevent volatility. 

I would just ask what produces a greater risk of volatility, a 

GAO audit of the Fed’s conduct of monetary policy that deviates 

from a reference rule or the opaque process that led up to the financial crisis, which was characterized by a monetary policy 

untethered to any predictable rule day-by-day, based on the whims 

of the Open Market Committee? 

That is a hypothetical question. Let me just take the remaining 

time to ask a question to Ms. Peirce really quickly on the regulatory policies of the Federal Reserve. 

When we talk about applying cost-benefit analysis to the Federal 

Reserve, does it create a problem when the cost-benefit analysis requirements are applied to Executive Branch or independent agencies like the SEC or the CFTC but do not apply to another prudential regulator in the form of the Fed? 

Ms. PEIRCE. It does create a problem. I think we saw that with 

the Volcker Rule, where the Fed didn’t have to do an economic 

analysis and so we got the Volcker Rule without an analysis. And 

I think that across-the-board, the Fed is a very powerful regulator 

and needs to be contributing its analysis also. 

Mr. BARR. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Florida, Mr. Ross. 

Mr. ROSS. Thank you, Mr. Chairman. 

Dr. Johnson, I appreciate the passion of your opening statement. 

And in your written opening, you indicate that everyone involved 

52 

in designing and implementing monetary policy and financial regulation should ultimately be accountable, at least indirectly, to the 

electorate. 

My question to you, first of all, is, how do you manage that? How 

do you make them even indirectly accountable to the electorate? 

Because I believe we all agree that accountability is important. 

Mr. JOHNSON. Congressman, the system, as you know far better 

than I, that has worked well for 200 years in the American public 

is that you have the President nominate people, subject to Senate 

confirmation, and then you have regular oversight hearings of various kinds. And that is what we do for the Board of Governors of 

the Federal Reserve System. 

It is not what we do for the Presidents of the Reserve Banks. 

Now, that is the result of a very strange compromise that was negotiated for the 1913 Act, and it has become, I think, increasingly 

problematic. 

You are making some very good points about oversight and the 

need for oversight— 

Mr. ROSS. But there should be oversight. 

Mr. JOHNSON. —and there is no oversight in the New York Fed. 

Mr. ROSS. It is created by Congressional empowerment; it should 

have Congressional oversight, period. Would you agree with that? 

Mr. JOHNSON. Yes, it should, but it doesn’t. I am telling you, the 

Reserve Banks are not subject to the same accountability as the 

Board of Governors. 

Mr. ROSS. But all that we are— 

Mr. JOHNSON. It is a big disconnect. 

Mr. ROSS. All that we are proposing here is just greater transparency. We are not saying substantively these are the rules— 

Mr. JOHNSON. No, here you are not addressing the main problem 

in the Federal Reserve System, which is the Reserve Banks. 

Mr. ROSS. Let me ask you this, because they do have an independent budget. They operate with what they are able to sustain 

off of their investments and whatnot. But how would requiring the 

Fed to publish the salaries of employees who are paid at GS–15, 

which is $124,000 and higher, hinder that budget independence? 

Wouldn’t it just be good transparency to know that? 

Ultimately, if there is any excess in the Fed, that money has to 

go back to the Treasury. So I think, again, being accountable and 

making sure that we are accounting for all those dollars so that the 

Treasury gets what they are entitled to, posting something like 

that wouldn’t be a bad thing. 

Mr. JOHNSON. It is an interesting question. Are you going to require this also of the Reserve Banks? Are you going to require the 

salary disclosure of the executives of the New York Fed? 

Mr. ROSS. What is wrong with— 

Mr. JOHNSON. Because they are not paid on the same scale. 

Mr. ROSS. What is wrong with requiring—sir, I only have 5— 

Mr. JOHNSON. Congressman, I am answering the question. 

Mr. ROSS. —minutes. I don’t suffer blank air that well. It makes 

me a little bit impatient. 

All I am saying is, in this particular situation, why not have it 

disclosed? 

Mr. JOHNSON. I am asking— 

53 

Mr. ROSS. And you are answering with a question. 

Mr. JOHNSON. I am asking— 

Mr. ROSS. If you can’t give me an answer, that is fine. 

Mr. JOHNSON. I am asking in order to understand what you are 

proposing. 

Mr. ROSS. Dr. Calabria, what— 

Mr. JOHNSON. If you are going to include the Reserve Banks— 

Mr. ROSS. This is my time, please, sir. 

Chairman HENSARLING. The time belongs to the gentleman from 

Florida. 

Mr. CALABRIA. I am going to try to answer Professor Johnson’s 

question, which is, in my read of the Act, where it says, ‘‘the Board 

of Governors of the Federal Reserve System,’’ so I think you should 

broaden that. To me, I think it is certainly fair to have that disclosure for the Reserve Banks. So, I am agreeing with you that they 

should add that, the tweak. 

Mr. ROSS. Thank you. 

Mr. CALABRIA. That seems a reasonable approach, to me. 

Mr. ROSS. Ms. Peirce, it seems that Dr. Johnson believes that 

oversight, accountability, and independence are mutually exclusive. 

Do you agree with that? 

Ms. PEIRCE. No. I think that the framework is set up where you 

let the folks at the Federal Reserve do their jobs but they have to 

explain what they are doing to the Congress and the public and get 

feedback— 

Mr. ROSS. And explain how they are doing and why they are 

doing it. 

And, Dr. Johnson, am I mischaracterizing your testimony, that 

accountability and independence are mutually exclusive? 

Mr. JOHNSON. No, that is what I said in my first paragraph. 

Mr. ROSS. But let me ask you this question. 

Mr. JOHNSON. No, Congressman. You mischaracterized my testimony completely. 

Mr. ROSS. Again, and let me ask you this question. 

Mr. JOHNSON. Can I please answer the question? 

Mr. ROSS. If they have a policy for setting monetary policy that 

includes such things as the rate of inflation, GDP, and other factors, and that is good to have as a criteria, what is wrong with disclosing all criteria used in developing and implementing monetary 

policy? 

Mr. JOHNSON. Congressman, what has worked with regard to 

central banking for the past 100 years in this country and in other 

countries is to have the government—in this case, Congress—stipulate what the objectives are; it is up to you to determine the objectives. 

Mr. ROSS. Yes, it is. 

Mr. JOHNSON. If you don’t like the— 

Mr. ROSS. And that is what we are trying to do. We are just trying to make sure— 

Mr. JOHNSON. No. 

Mr. ROSS. —that we know what those objectives are that are— 

Mr. JOHNSON. No. 

Mr. ROSS. —being relied upon. 

54 

Mr. JOHNSON. No. Sorry, Congressman, you are going way beyond—you are going way beyond what Congress has done in the 

past 100 years. 

Mr. ROSS. Again, I appreciate— 

Mr. JOHNSON. That is your prerogative, of course, but this is radical, new— 

Mr. ROSS. Dr. Taylor, quickly, I just have 40 seconds left. While 

I understand that international coordination is necessary—we live 

in a different environment than we did 5 or 10 years ago, in a global economy. But are you worried that the Federal Reserve may be 

prioritizing international stability over the domestic stability and 

regulation, with their involvement with FSOC, with their involvement with the international regulatory environment? Are we discounting our domestic regulatory environment in lieu of trying to 

maintain or at least gain some international control or influence? 

Mr. TAYLOR. I think, to answer your question, Congressman, that 

the best thing the Fed can do is have a monetary policy that is 

good for the United States, and that is basically going to help the 

globe. 

I think, to some extent, right now, the policy it has, has been disturbing globally. It is basically—even this so-called ‘‘taper tantrum’’ 

had impacts all over the world, and that comes back and hurts the 

United States. 

So it does make sense to think about U.S. monetary policy as 

having effects abroad and worrying about those because they feed 

back onto the United States. I think it is very important. 

Mr. ROSS. Thank you, Dr. Taylor. 

I see my time has expired. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

And thank you all for being there. 

As we all know, in the wake of recent financial crises, the Federal Reserve has absolutely accumulated a vast amount of unprecedented power to oversee our economy. Its balance sheet alone has 

grown to a staggering $4.3 trillion, one-fifth of the economy, and 

it has also grappled with an expanded array of regulatory duties. 

My constituents demand that the Fed account for its handling of 

these important issues. That is just common sense. After all, Fed 

policy affects every aspect of our Main Street economy, from the 

price of daily essentials like gas, milk, and bread, to the cost of a 

home and the strength of seniors’ retirement savings. 

The Federal Reserve must remain an independent agency that 

can withstand political threats to that independence, but this bill 

does not tell the Fed when or how to do its job. It just requires that 

the Fed take a transparent, measured approach to doing so. An 

independent Fed shouldn’t equal an opaque Fed. 

These sensible reforms could bring the accountability to the Federal Reserve that the American people demand. And I thank the 

committee for taking up this legislation. 

I want to focus, in my question time, on the stress-test provision 

in the bill. Stress tests can be a very important way to show that 

large financial institutions can, in fact, withstand an economic 

55 

downturn. This reduces the likelihood of future bailouts because 

they encourage companies to follow safe and sound business practices. They also convince our Nation’s policymakers that the proverbial sky will not fall during an economic downturn. 

However, I am also deeply concerned about the highly secretive 

and unpredictable nature of the stress-testing process. The Fed 

doesn’t have to follow the notice-and-comment process, too often focuses on unpredictable qualitative factors, and doesn’t provide 

banks with a detailed accounting of the stress-test methodology. In 

practice, banks respond by constraining their lending, which 

hinders the economic recovery that my constituents desperately 

need. This legislation addresses those concerns. 

Some, such as our distinguished panelist, Dr. Johnson, worry 

that this legislation undermines the efficacy of the stress test. He 

believes it will make it easier for other companies to tailor their 

balance sheets to Fed methodologies, gaming the system. 

I wonder, can the remaining panelists explain why companies 

won’t improperly game the system? For example, if the Fed believes in its stress-test model and that passing banks are safe and 

sound, why shouldn’t there be transparency? I would ask the other 

three if you have a response? 

Mr. TAYLOR. I think the reforms improve the ability of the stress 

test to work. 

I do think that it needs to be supplemented with these leverage 

ratios or with a combination of the risk-weighted capital requirements. And, in fact, the more I think about these issues that you 

are raising—‘‘too-big-to-fail’’ resolution, Title 2 of Dodd-Frank, 

Chapter 14—the more I realize that a simpler way would be to just 

get these capital requirements at a more satisfactory level. 

Mr. CALABRIA. So let me parse out where I think I very much 

agree with the questions and then maybe where I have some concerns. 

Where I very much agree is that our system is very procyclical, 

in my opinion. I think we let booms get out of control, and I think 

during the busts we clamp down too hard and end up—I think our 

current regulatory system ends up being, again, exacerbating the 

swings. That needs to be addressed. 

I don’t necessarily think the biggest problem in that is the stress 

tests. As I mentioned earlier, I am very skeptical of the stress 

tests. I would abandon them altogether, quite frankly. I don’t think 

they are very informative, in my opinion. Then again, I don’t actually think they are very stressful. 

So that point is, again, I would just drop the stress tests altogether and focus on simpler, more transparent ratios, like a leverage ratio. 

Mr. HULTGREN. Ms. Peirce, a quick thought? 

Ms. PEIRCE. You could enhance the credibility of the stress tests 

by making them more open so people knew what the models were, 

what the assumptions were, and then people could comment on 

whether they thought those were strong enough or not. We saw in 

Europe that people didn’t believe the stress tests were very credible 

there. And so you could have stronger ones. 

But I also worry that the banks are spending so much time worrying about what assumptions, what data the Fed is using in its 

56 

models that they are not worrying about the real business realities 

that they are facing as a bank. And if we don’t believe that bankers 

can manage their own banks without the Fed walking them 

through it, I think we are in a really bad place. We can’t rely on 

regulators to run our banks. 

Mr. HULTGREN. I just have about 30 seconds left. I wanted to 

talk quickly about the cost-benefit analysis on all regulation that 

I believe is necessary. 

I wonder, Dr. Taylor, does the Fed’s independence require that 

the Fed be exempt from a review of its rules by the courts? Does 

Fed independence in setting monetary policy mean that the Fed’s 

financial regulations are above the law? 

Mr. TAYLOR. I think cost-benefit analysis applied to the regulatory doesn’t sacrifice the Fed’s independence. Other agencies do 

that. I think it makes sense. 

Mr. HULTGREN. Thank you very much. 

My time has expired. I yield back, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

There are no other Members in the queue. Thus, I would like to 

thank each one of our witnesses for their testimony today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing stands adjourned. 

[Whereupon, at 12:43 p.m., the hearing was adjourned.] 

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A P P E N D I X 

July 10, 2014 

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