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UNCONVENTIONAL MONETARY POLICY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON MONETARY 

POLICY AND TRADE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

DECEMBER 7, 2016 

Printed for the use of the Committee on Financial Services 

Serial No. 114–112 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

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 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

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 

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 

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 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON MONETARY POLICY AND TRADE

BILL HUIZENGA, Michigan, Chairman 

MICK MULVANEY, South Carolina, Vice 

Chairman 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

LYNN A. WESTMORELAND, Georgia 

MARLIN A. STUTZMAN, Indiana 

ROBERT PITTENGER, North Carolina 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

MIA LOVE, Utah 

TOM EMMER, Minnesota 

GWEN MOORE, Wisconsin, Ranking Member 

BILL FOSTER, Illinois 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

PATRICK MURPHY, Florida 

DANIEL T. KILDEE, Michigan 

DENNY HECK, Washington 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

December 7, 2016 ............................................................................................. 1 

Appendix: 

December 7, 2016 ............................................................................................. 41 

WITNESSES 

WEDNESDAY, DECEMBER 7, 2016 

Johnson, Simon, Ronald A. Kurtz Professor of Entrepreneurship, Professor 

of Global Economics and Management, Sloan School of Management, Massachusetts Institute of Technology ..................................................................... 9 

Levy, Mickey D., Managing Director and Chief Economist, Berenberg Capital 7 

Plosser, Charles, Visiting Fellow at the Hoover Institution, Stanford University, and former President and CEO, Federal Reserve Bank of Philadelphia 

(2001-2015) ........................................................................................................... 5 

Taylor, John, Professor of Economics, Stanford University ................................. 4 

APPENDIX 

Prepared statements: 

Johnson, Simon ................................................................................................. 42 

Levy, Mickey D. ................................................................................................ 47 

Plosser, Charles ................................................................................................ 54 

Taylor, John ...................................................................................................... 75 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Mulvaney, Hon. Mick: 

Written responses to questions for the record submitted to Mickey D. 

Levy ................................................................................................................ 79 

Written responses to questions for the record submitted to Charles 

Plosser ............................................................................................................ 81 

Written responses from Chair Yellen from a September 28, 2016 hearing . 83 

(1) 

UNCONVENTIONAL MONETARY POLICY 

Wednesday, December 7, 2016 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON MONETARY

POLICY AND TRADE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:08 a.m., in room 

2128, Rayburn House Office Building, Hon. Bill Huizenga [chairman of the subcommittee] presiding. 

Members present: Representatives Huizenga, Mulvaney, Pearce, 

Stutzman, Schweikert, Love; Moore, Foster, Sewell, Kildee, and 

Heck. 

Ex officio present: Representative Hensarling. 

Also present: Representative Hill. 

Chairman HUIZENGA. The Subcommittee on Monetary Policy and 

Trade will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time.Also, without objection, I ask unanimous consent that any member of the full 

Financial Services Committee who doesn’t sit on this particular 

subcommittee be able to participate and ask questions during today’s hearing. 

Today’s hearing is entitled, ‘‘Unconventional Monetary Policy.’’ 

I now will recognize myself for probably the better part of that 

5 minutes. So lacking logic or evidence, today’s macro economic 

oracles endorse unsustainable deficits and unconventional monetary policies. The oracles say the economy would be booming except 

for fiscal austerity. However, as the debt clock in this hearing room 

clearly shows that is often up, not unfortunately right now, but as 

often is displaying fiscal policy is anything but austere. 

Denying that their prescriptions created a heavy drag on our 

economy, the oracles point to ever-changing head winds. For example, they tell us that an aging population is causing labor force participation to plumb bottoms last seen in the 1970s. Their hypothesis is short on facts, however. For example, median age in the 

1970s is a decade lower than today’s. So if aging is a problematic, 

then the oracles would predict strong labor participation in the 

1970s, even though it is the same disappointing level as today. 

The 1970s is also similar to the 2010s on another important dimension. Separated by four decades, they both suffered from 

distortionary economic and monetary policies. Refusing to let facts 

get in the way of fantasy, the oracles tell us that the American 

households would even be worse off except for these unsustainable 

deficits and unconventional monetary policies. The evidence. Well, 

2 

we are doing better than the likes of Japan or the European Union. 

That story might fly in the faculty lounge, but it certainly doesn’t 

around dinner table. The star pupil in the class of central banks 

gone wild has nothing to brag about. 

The American dream is at a risk. Pre-recession productivity 

meant that living standards could double every generation. Under 

today’s opaque and distortionary monetary policies, however, productivity has been cut in half. The oracles call this the new normal. 

Well, I believe they are wrong. This is neither normal nor acceptable. Not too long ago our children could reliably look forward to 

the doubling of their living standards. Under today’s monetary and 

economic policies, a doubling of living standard might instead wait 

for our children’s children. With logic and evidence having left their 

side, perhaps the oracle should embrace the strategy from 

Seinfeld’s George Costanza. 

Now, Mr. Chairman, I am not sure if we have ever quoted 

George Costanza in this committee, but here we go. ‘‘If every instinct you have is wrong, then the opposite would have to be right.’’ 

The oracles tell us that without their seat-of-the-pants response 

to the Great Recession, our economy would be even further below 

potential almost 8 years post recession. The opposite would have 

had a hard time doing worse. Today’s macro economics aim policies 

at highly aggregated variables that have little if anything to do 

with what drives our economy. 

Their answer for economic fluctuations is to further distort 

spending on consumption, investment, or government. But just as 

businesses cannot hide mismanagement for long behind the income 

statement manipulations, governments cannot mask malaise by diverting money into politically favored national income accounts. 

This pretense of knowledgehas grown from a macroeconomic orthodoxy where repeated failures of unconventional monetary and economic polices count as evidence that we didn’t do enough. 

Economic opportunity reliably increases when monetary policy 

adheres to its vital duty, that is, facilitating commerce wherever it 

shows promise. Throughout our current economic malaise, monetary policy has not only ignored this duty, it continues to ignore the 

consequences of ignoring this duty. Annually, since 2007, the Fed’s 

monetary policy committee predicted that its principle-free decisions would trigger a more resilient economy. Each year, reality fell 

further from prediction, and according to the Fed’s own researchers, the FOMC, quote, did not anticipate the great recession, underestimated the severity of the downturn, and consistently overpredicted the speed of the recovery. 

A decade of economics-free monetary policy is not working because it cannot work. Returning to a robust economy requires a 

more firmly grounded and transparent policy. That transition cannot happen until the Fed shrinks its balance sheet, brings interest 

rate and credit risks out of the bureaucratic shadows. In the same 

vein, policy distortions will remain elevated until the Fed also returns to a monetary policy that does not only what it can, produce 

an efficient exchange medium so that goods and services, which includes labor, can easily find their most promising opportunities. 

3 

The Chair now recognizes the ranking member of the subcommittee, the gentlelady from Wisconsin, Ms. Moore, for 5 minutes as well for an opening statement. 

Ms. MOORE. Well, thank you so much, Mr. Chairman, and let me 

thank this distinguished panel for yet an opportunity to talk about 

our economy, our monetary policy, and to really sort of dig down 

deep into the theoretical and the what will really work in the real 

world and the practical application. 

I want to make a couple of observations about this, our what is 

it, Mr. Chairman, our fourth or fifth hearing on unconventional 

monetary policy. Which one? I yield. Is that 4th or 5th? Anyway— 

Chairman HUIZENGA. Pretty much any time we have been discussing monetary policy, it’s been about— 

Ms. MOORE. Great. And we have had a great discussion, particularly, Dr. Taylor, on your Taylor rule, so we have examined this in 

the abstract, I must admit. And speaking of dinner table conversation, this is great dinner table conversation, it is great economic 

journalism, but how would it have really worked in the real world? 

And we are having this conversation, of course, Mr. Chairman and 

witnesses, because we have faced an unprecedented financial crisis. 

So the Fed has done its job, and they have been forced into unconventional solutions. 

We know, from past conversations, that had we had a Taylor 

rule, the Fed, with its responsibility, would have had to have deviated from it at exactly this kind of—because of this kind of economic crisis. And I believe, Dr. Taylor, you will get a chance to talk 

to us some more in your testimony, but you yourself indicated to 

us that it was merely a guidepost. It was not something that was 

locked down. 

So it is not like we have had wild unruly monetary policy precrisis. I commend Dr. Taylor’s work, recognize his utility and intellectual circles, but I don’t see, Mr. Chairman, any reason for this 

committee to endorse the idea for real world application. 

Secondly, this hearing is admission by the majority that the real 

problem all these years has been Republicans’ refusal to seek, demand side fiscal solutions to help the economy. Seventy percent of 

our economy is actually based on consumers having money in their 

pockets and being able to support a fledgling economy. The austerity measures supported by our Republican friends hurt the economy, hurt people, and force the Fed’s hand on monetary policy. 

Now, you know, Republicans want us to buy the fact that tax 

cuts for the rich are the cure for this disease. Shareholders of the 

rich have been the ones helped by monetary policies by way of 

stock prices. 

Now, Mr. Chairman, if you want us to unwind the unconventional monetary policy, we need to look at ways to help the poor 

and the middle class, things like strengthening the safety net, like 

helping mothers, like investing in public education, how about public infrastructure? These are the kinds of things that stimulate the 

economy, the very things you will find in my bill called, ‘‘The Rise 

Out of Poverty Act,’’ helping everyday Americans still hurting in 

the housing downturn by robo foreclosures by men like our proposed Treasury Secretary who has helped himself by this government in crisis. 

4 

Thank you, and I would yield back the balance of my time. 

Chairman HUIZENGA. The gentlelady yields back. Well, today, we 

welcome the testimony of four distinguished folks: Dr. John Taylor, 

professor of economics at Stanford University; Dr. Charles Plosser, 

visiting fellow at the Hoover Institution, Stanford University, and 

former president and CEO of the Federal Reserve Bank of Philadelphia from 2006 to 2015; Dr. Mickey Levy, managing director and 

chief economist, Berenberg Capital; and Dr. Simon Johnson, who is 

the Ronald A. Kurtz professor of entrepreneurship, professor of 

global economics and management, the Sloan School of Management at MIT. 

So each of you will be recognized for 5 minutes to give an oral 

presentation of your testimony, and without objection, each of your 

written statements will be made a part of the record. 

With that, Dr. Taylor, you are now recognized for 5 minutes. 

STATEMENTS OF JOHN TAYLOR, PROFESSOR OF ECONOMICS, 

STANFORD UNIVERSITY 

Mr. TAYLOR. Thank you Mr. Chairman, Ranking Member Moore, 

other members of the committee, and Chairman Hensarling for inviting me here to speak about unconventional monetary policy. 

I think the Federal Reserve’s move toward unconventional monetary policy can be traced back a dozen years to so-called ‘‘too low 

for too long period’’ of 2003-2005. During this period, the Fed held 

its policy rate, the Federal funds rate well below what was indicated by the experiences of the previous two decades of good economic performance. During this 2003-2005 period, the Fed also 

started giving forward guidance that its policy rate would remain 

very low for a considerable period and that it would be raised only 

at a measured pace. 

These actions were a departure from the policy strategy that had 

worked well in the 1980s and 1990s. Regardless of the reasons, the 

results were not good. The excessively low rates along with promises that they would remain low brought on a risk-taking search 

for yield and excesses in the housing market. Along with a breakdown in the regulatory process, these policies were a key factor in 

the financial crisis and the great recession. 

During the panic in the fall of 2008, the Fed did a good job in 

its lender-of-last-resort capacity by providing liquidity to the financial markets and by cutting its policy interest rate. But then Fed 

policy moved sharply in an unconventional direction. The Fed purchased large amounts of U.S. Treasury and mortgage-backed securities in 2009, financed by equally large increases in reserve balances, which enlarged the Fed’s balance sheet. And long after the 

recession ended, these large-scale asset purchases continued and 

the Fed held its policy interest rate near zero when indicators used 

in 1980s and 1990s suggested higher rates were in order. The Fed 

also utilized forward guidance in this period would change the 

methodology several times, which increased uncertainty. 

My research and that of others over the years shows that these 

policies were not effective and may have been counterproductive. 

There is now a growing consensus that the extra low interest rates 

and unconventional monetary policy have reached diminishing or 

even negative returns. 

5 

The unconventional policies have also raised public policy concerns that the Fed is being transformed into a multipurpose institution, intervening in particular markets, and allocating credit, 

areas where Congress may have a role but not a limited purpose 

independent agency of government. 

In many ways, this recent period can be characterized as a deviation from our rule-like systematic, predictable, strategic, and limited monetary policy that worked well in the 1980s and 1990s. The 

policy implication of this experience is clear. Monetary policy 

should be normalized. The Fed should transition to a sound rulebased monetary policy like the one that worked in the past while 

recognizing, of course, that the economy and markets have evolved. 

As part of the normalization process, the size of the Fed’s balance 

sheet should be gradually reduced. For reasons I gave when I testified at this committee last May, reserve balances should be reduced 

to the size where the interest rate is market determined rather 

than administered by the Fed as it sets the rate on excess reserves. 

Normalization is easier if there is an understanding of the basic 

monetary strategy. This and recent experience point to the need for 

monetary reform. A good reform is now part of the format. It would 

require the Fed to describe the strategy or rule of the Federal Open 

Market Committee for the systematic quantitative adjustment of 

its policy instruments. 

I think monetary normalization and reform have important implications for the international monetary system as well. Unconventional monetary policies with near zero policy rates have spread 

internationally to other central banks. Because a key foundation of 

a transparent rules-based international monetary system is a 

rules-based policy in each country, normalization and reform by the 

Fed is a key part of international monetary reform, and I think 

international monetary reform will in turn benefit the United 

States. 

In conclusion, let me emphasize that monetary reform, tax reform, regulatory reform, and budget reform often go together. They 

reinforce each other. All are crucial to a prosperous economy. I 

think the opportunity for monetary reform is now better than it 

has been in years. 

Thank you, Mr. Chairman. 

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

of the appendix.] 

Chairman HUIZENGA. Thank you. And with that, Dr. Charles 

Plosser, you have 5 minutes for your presentation. 

STATEMENT OF CHARLES PLOSSER, VISITING FELLOW AT 

THE HOOVER INSTITUTION, STANFORD UNIVERSITY, AND 

FORMER PRESIDENT AND CEO, FEDERAL RESERVE BANK OF 

PHILADELPHIA (2001-2015) 

Mr. PLOSSER. Thank you, Chairman Huizenga, and members of 

the subcommittee, I appreciate this opportunity to come share with 

you some thoughts on the Federal Reserve. 

Let me begin with two important points that illustrate the challenges as we think about central bank reforms. Central banks, for 

the most part, are given the responsibility to preserve the purchasing power of a nation’s fiat currency. One way the Fed does 

6 

this is by buying and selling securities in the open market to control the growth of credit and money. This gives the Fed extraordinary powers to intervene in financial markets, not only through 

the quantity of it purchases but also of the types of assets it can 

buy. 

The second point is that history teaches us that economic stability and prosperity are far more likely when there is a healthy 

degree of separation between government officials who are responsible for tax and spending policy and those in charge of printing 

money. Otherwise, printing money seems to become an easy substitute for tough fiscal choices. 

Argentina is an example that has been stagnant and rife with 

periods of inflation and financial turmoil over the last three decades, at least. In large part, this is due to a lack of effective separation between the central bank and the fiscal authorities. 

These two points highlight a major tension in the discussions of 

central bank reform. How, in a democratic society, do you preserve 

a central bank’s independence while ensuring that it has adequate 

tools for success and can be held accountable to the public? 

I believe there are three responsible ways to address this tension: 

Simplify the goals, constrain the tools, and make decisions more 

systematic and predictable. All three steps can lead to clear communications and a better understanding of monetary policy on the 

part of the public without undermining independence. In my brief 

time, let me just touch on two of these strategies. 

The Fed is said to have a dual mandate, price stability and maximum employment, yet the broader the mandate, the more opportunity there is for discretion, and the more discretion means there 

is more scope for political interference and uncertainty over the direction of policy. Policymakers can find themselves futilely chasing 

one goal after another. 

Unfortunately, over the last decade, the Fed’s mandate seems to 

have experienced mission creep, expanding the scope for discretionary action, and the opportunity for political interference. The 

public and the Fed have talked as if monetary policy should be responsible for stock market valuations, income inequality, labor 

force participation rates, real wage growth, and an expanding list 

of other dubious objectives. 

Indeed, around the world, it seems that central banks are being 

asked to solve all manner of economic ills from fiscal crisis in Europe to low productivity and structural challenges in Japan and the 

United States. I think this is a mistake and potentially dangerous 

for the institution and the economy. 

Moreover, these broad mandates make it extremely difficult to 

hold a central bank accountable. I am reminded of the old saying: 

Responsible for everything but accountable for nothing. Institutions 

are guaranteed to fail when they are assigned responsibility for 

outcomes that they cannot substantially influence. The hubris of 

central bankers and the unrealistic expectations of the public and 

governments are out of line with what we can realistically expect 

for monetary policy. 

As the Nobel Laureate Milton Friedman warned us almost 50 

years ago, ‘‘We are in danger of assigning to monetary policy a 

larger role than it can perform, in danger of asking it to accomplish 

7 

tasks it cannot achieve, and as a result, in danger of preventing it 

from making the contribution that it is capable of making.’’ 

One way to address these concerns and to help reset expectations 

is to narrow the monetary policy mandate to focus solely or at least 

predominantly on price stability. Many major central banks around 

the world already have such a more narrow mandate or hierarchal 

mandate of this kind. It would focus the Fed’s attention, reduce the 

opportunity for discretion, and make it easier to hold the Fed accountable for its actions. It would also provide some protection to 

the Fed from demands arising inside and outside central banks to 

pursue other mostly unachievable objectives. 

A second way to restrict central bank interventions is to limit the 

types of assets that can be purchased, thus constraining the composition of the Fed’s balance sheet. For the U.S., I suggest that the 

Fed be restricted to an all-treasury portfolio. During the crisis and 

recession, the Fed engaged in large scale purchases of mortgage 

backed securities in an effort to help the housing sector. It also 

purchased distressed securities during the rescue of Bear Stearns 

and AIG. Such actions are a form of credit allocation and thus a 

type of fiscal policy. Fed independence should not include making 

fiscal policy decisions as it undermines the separation of authorities and thus independence. Fiscal authority should take responsibility for fiscal actions. 

If the Fed is to engage in the purchase of private sector securities or credit allocation, it should do so at the request of the fiscal 

authorities. The Treasury should then take possession of those assets in exchange for Treasury securities so the central bank can resume its task of conducting monetary policy, and maintain the separation of fiscal and monetary policy remains intact. Thank you 

very much for your attention. 

[The prepared statement of Dr. Plosser can be found on page 54 

of the appendix.] 

Chairman HUIZENGA. Thank you, Dr. Plosser, and I have a 

sneaking suspicion that your Milton Friedman quote just beat my 

George Costanza quote. 

With that, Dr. Levy, we would like to welcome you here as well, 

and you have 5 minutes for your presentation. 

STATEMENT OF MICKEY D. LEVY, MANAGING DIRECTOR AND 

CHIEF ECONOMIST, BERENBERG CAPITAL 

Mr. LEVY. Mr. Chairman and members of the committee, I really 

appreciate this opportunity not just to speak about monetary policy 

but also economic policies in general. 

The Fed’s unconventional policies do deserve credit for lifting the 

economy and financial markets from crisis in 2008 and 2009. However, it is quite striking that since then, Fed’s sustained negative 

real interest rates, quantitative easing and forward guidance, while 

they successfully stimulated financial markets, pushed bond yields 

lower, pushed up asset prices, encouraged risk taking, they failed 

to stimulate the economy. Nominal GDP growth, that is, current 

dollar spending in the economy is actually decelerated. Real economies languished. 

In recent years, the Fed’s unconventional policies have not had 

their intended impact but instead have created mounting distortion 

8 

and have been inconsistent with the Fed’s long-run objectives and 

its objective of macroprudential risk. 

Why have the Fed’s policies been ineffective? Because the constraints on growth are nonmonetary in nature. Along with many 

factors, government policies have been a key source of the weakness. The adverse impacts are particularly apparent in business investment. Consumption and housing have been growing fine, but 

business investment has been notably weak, and this has not only 

been the weak link in the economy, it has been the source of the 

weak productivity and estimates of lower potential growth. 

Beyond the mounting government debt and expectations of higher taxes, there has been just this growing web of government regulations, mandated expenses, and higher tax burdens not just on the 

Federal level but on the State and local levels that have weighed 

very heavily not just on the banking and financial sectors but also 

in business investment and the broader economic environment. 

The burdensome micro regulations imposed by Dodd-Frank have 

deterred bank lending, particularly of medium- and small-sized 

banks, and they are at cross-currents with the Fed’s easy monetary 

policy. In nonfinancial sectors, an array of regulations and government mandated expenses and taxes have reduced efficiencies of 

production, inhibited labor mobility, and lowered risk adjusted 

after tax rates of return on investment, and they have added a tremendous layer of uncertainty in business decisionmaking. 

So while the Fed has very effectively lowered the real cost of capital, these government policies have forced businesses to raise their 

hurdle rates required for capital spending and expansions. So potentially productive expansion plans have been sidelined, businesses are taking advantage of the low interest rates environment 

provided by the Fed to issue bonds, but they are buying back stock 

rather than expanding, corporate indebtedness rises, and it doesn’t 

add to productive capacity, and also, there are a lot of distortions 

in labor markets. 

The critical point here is these policies are beyond the Fed’s monetary policy scope, and trying to offset these negative impacts with 

excessive monetary eases, generated mounting financial distortions, 

and unfortunately, I think just now we are just beginning to feel 

the negative effects of the Fed having been too easy too long. The 

next couple of years may be kind of tough. 

So the Fed has recently come to acknowledge that its monetary 

policies have lost their punch and has recommended a shift toward 

fiscal stimulus. So before I outline some suggestions for monetary 

policy, I have a critical point to make on fiscal policy. 

It is critically important to distinguish between fiscal reform and 

fiscal stimulus that simply involves more deficit spending. The 

economy is in its eighth consecutive year of expansion, the unemployment rate is 4.6 percent, and the economy is growing at a pace 

consistent with the Fed’s potential. What is not needed is countercyclical fiscal stimulus in the form of more deficit spending. 

The focus of fiscal reform should be tax and spending reforms 

that raise potential growth, corporate tax reform which involves 

lower rates and a broader base through reducing deductions, deferrals, credits, exemptions, these and lower rates and simplification, 

this would encourage business investment and expansion. 

9 

Infrastructure spending initiatives, we have to focus on projects 

that add to productive capacity and provide benefits that exceed 

cost while avoiding quick-spend projects aimed at temporarily 

boosting growth and jobs. I mean, it is critically important. Reform, 

fiscal reform does not just mean more deficit spending, and that is 

going to be critically important as we enter 2017. 

Now, on monetary policy and— 

Chairman HUIZENGA. Dr. Levy, I am going to have to ask you to 

wrap it up here quickly. 

Mr. LEVY. Quickly. Raise rates, cease reinvesting—cease reinvesting maturing assets, de-emphasize the short run and fine tuning, change policy statements accordingly, and move toward more 

rules-based policies that provide flexibility. 

[The prepared statement of Dr. Levy can be found on page 47 of 

the appendix.] 

Chairman HUIZENGA. I will yield some of my time to allow you 

to expand on that when we come back to questioning. 

So with that, Dr. Johnson, you have 5 minutes. 

STATEMENT OF SIMON JOHNSON, RONALD A. KURTZ PROFESSOR OF ENTREPRENEURSHIP, PROFESSOR OF GLOBAL 

ECONOMICS AND MANAGEMENT, SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS INSTITUTE OF TECHNOLOGY 

Mr. JOHNSON. Thank you, Mr. Chairman. I agree with you completely, Mr. Chairman, with regards to your initial statement on 

the fact that this is not normal, what we have now, and it is not 

acceptable. I think you and I may have a slightly different reading 

of recent economic history, but maybe it is not that different. 

We had an enormous financial crisis and collapse. I was the chief 

economist of the International Monetary Fund in 2007 through August 2008. We were worried about how bad it was getting in the 

United States, and we encouraged preventive measures. None of 

that was effective, and the crisis turned out to be much bigger than 

what we anticipated and much bigger than what we had seen and 

what I had worked on over the past 30 years. 

Now, I agree with Chairman Hensarling that an undercapitalized 

financial system was the core of what went wrong. I think we disagree on some of the ancillary related measures, but capital, lack 

of capital in our financial system, and funding it with way too 

much short-term debt was the core problem. Massive financial crisis result in anemic recoveries. I am afraid that is not—that is not 

just astatement about the United States. That is a general statement about what we have learned over the past 200 years of finance and economics. 

The second point on which I share, I think—I certainly agree 

with most of my fellow panelists is that monetary policy is a limited tool that cannot do very much. And I think it is—and I agree 

with Dr. Plosser, you shouldn’t overreach with monetary policy. I 

would say, and I think I have seen this in some of the other testimony, including Dr. Levy’s, that QE1 done at the end of 2008, 

2009, absolutely unconventional monetary policy, yes. Specifically 

targeted supporting mortgage-backed securities and a piece of the 

key pipeline for credit and securities markets that are broken completely, that is what they did. I think it was a good idea. The fog 

10 

of war applies in finance as well as in war, you don’t know exactly 

what is happening at the time, but I fully support what the Fed 

did in that instance. 

Subsequent iterations and attempts to continue with that policy, 

we can discuss. I think much less effective would be a fair way to 

say it, and that is also what Mr. Bernanke says. 

Rules can help monetary policy, and if, hypothetically, Dr. Taylor 

or Dr. Plosser end up back on the FOMC, I will be fully supporting 

their rights and ability as members of that committee to determine 

rules. I really don’t think you want to micromanage the Federal 

Reserve. It is not what we have been historically. You can set the 

objectives, and I commend you, Mr. Chairman, for focusing our attention on that. I think you should continue with the existing objectives personally, but I think we are going to discuss that a lot 

more. 

The third part of what went wrong in the economic history, 

which is a piece I am sure we absolutely disagree on completely, 

which is fiscal policy. Again, former chief economist at the IMF. I 

don’t run around the world telling people to stimulate their economies, and I am not in favor, generally speaking, of using fiscal policy for any, any short-term response to anything, all right. That is 

more a job of monetary policy if, you know, subject to Taylor rule 

type considerations. 

However, again, largest financial crisis since the great depression, limited ability of monetary policy to respond, QE1, but perhaps we are not convinced of anything beyond that, what else do 

we have? We have a massive crisis. You said—actually, I liked your 

formulation of monetary policy, was one of my favorites ever, I 

wrote it down: Monetary policy should be to facilitate commerce. 

Absolutely. Completely correct. 

The private sector economy was broken, and 99 percent of people 

in the private sector economy had no responsibility for what went 

wrong. They were completely innocent bystanders, and that includes all the people in finance, by the way. They were just doing 

their jobs. Devastating impact, limited ability of the government to 

respond with monetary policy, what else are you going to do? 

In those circumstances, and only in those circumstances, I think, 

and I testified before other committees of Congress to this effect at 

the time, some fiscal stimulus, including large tax cuts, I argued 

for bigger tax cuts than were actually put through by this Congress, by the way, as well as other measures on the spending side. 

We are out of that phase. Now the issue for fiscal policy is medium term, how do we get away from this for normal, ‘‘normal,’’ 

how do we get to higher rates of growth? And here I am completely 

siding with Congresswoman Moore. I work a lot with the private 

sector. My job at MIT is to help companies grow in the United 

States and around the world. What do they need? They need people. They need human capital. They need infrastructure. 

I am not saying that this is the miracle cure. I am not saying 

you do it on a 1- or 2-year time horizon, but I think over a 10- to 

20-year period, when you look at productivity prospects in the 

United States, when you look at our ability to compete, when you 

look at the ability of our companies to stand up and to do better 

than other companies with regard to innovation and employment, 

11 

people, really good people. And of course, that is about opportunity. 

It is about who gets the education and who can climb up the social 

ladder, which we used to be good at in this country, but unfortunately, the past three decades, we have lost that. 

Thank you. 

[The prepared statement of Dr. Johnson can be found on page 42 

of the appendix.] 

Chairman HUIZENGA. I appreciate that. Thank you very much. 

At this point, I will recognize myself for 5 minutes, and I would 

like to go back to Dr. Levy because I think we have stumbled into 

something, and we did this in another hearing previously with the 

ranking member and myself that we agree that, frankly, the rich 

on Wall Street have gotten richer, while most others have been left 

behind. And kind of getting to where Dr. Johnson was going, you 

know, the question is, is why and how. 

And is this because we have not borrowed enough money to do 

more stimulus spending, as some would seem to argue, or—and Dr. 

Levy, when you were talking about this, I had written this out on 

my notepad of a recent example. I sat down with a CEO of a publicly traded company, large influential, sort of in the financial services space, and he walked me through the pressures that he is feeling from his shareholders, including institutional investors like 

CalPERS and others to take advantage of the artificially low interest rate environment, to borrow money, to then buy back his own 

stock, and as he said, or the stock of a publicly traded company, 

as he said, I have become fabulously wealthy. In fact, I looked it 

up. He has just cashed in a seven figure amount of stock again. He 

said: I have become fabulously wealthy, but it is not the right thing 

for the economy overall. 

And it was in stark terms, and he is like, but if I don’t do this, 

so you know, I have one small little corner of this, but I have 

CalPERS, and I have a number of other institutional investors who 

literally could take me to court for not fulfilling my requirement of 

maximizing the return for them. And that was rather stark for me, 

and I just wanted you to maybe comment on that a little bit, and 

I would love to hear from all four of you quickly. 

My original question, has the Fed become more political, and I 

kind of maybe altered this, changing it slightly, has the Fed been 

politicized is really what I want to know. And so Dr. Levy, I want 

to start with you and give you a brief opportunity as well to touch 

on, and if you had any of those other points that you wanted to 

make towards the end when I had to cut you off, so— 

Mr. LEVY. Has the Fed become politicized? Yes, on the inside the 

way it operates and on pressures from the outside, and I think it 

is a real concern because we all benefit from a central bank that 

pursues its long run objectives, and so I—there is a laundry list of 

ways that the Fed has become much more politicized. 

Back to your point on Wall Street, and I am an economist and 

not an investment banker that has benefitted by all the Wall Street 

largesse. Wall Street makes a lot of money through leverage, okay, 

and so, you know, when they have had low capital positions and 

a lot of leverage and they have played the positive carry game and 

taking advantage of their leverage, this generates very large profit. 

So I would be very much in favor of legislation that requires higher 

12 

capital adequacy while at the same time reducing a lot of the 

micromanagement from the Fed, the OCC, and the like. And so I 

think this would be—that would lead to better balance of people on 

Wall Street. 

Chairman HUIZENGA. And isn’t it true that—I mean, companies, 

whether they are in the financial services space or whether they 

are, frankly, in manufacturing or any other space, they are not just 

looking at tax rates. They are looking at the regulatory environment that is causing uncertainty, correct? I mean, when they are 

going in, I think that is why we have seen—at least some would 

argue that we have seen some rebounds, in the overall optimism, 

is that there is going to be some stability, hopefully, and some predictability in the regulatory space, not just in that tax space. 

Mr. LEVY. I completely agree. Surveys of businesses, they are 

big—business’ biggest concern, of course, is product demand, but 

right behind that are concerns about taxes and regulation. So once 

again, while the Fed has been very successful lowering the real 

cost of capital, businesses, when they think about expanding and 

investing, their hurdle rate is pushed up by taxes and by regulations not just on the Federal level but the State and local levels 

where they operate, and it adds a huge layer of uncertainty, and 

they have to put that in their calculation. 

And so unwinding that, the build up in regulations, I think, 

would really lift a great cloud off of business investment, and expansion, and employment. And I think what I think the other panelists would totally agree with me on is if you could put in place 

policies that would lift productivity and potential growth, that 

would lift real wages. 

Chairman HUIZENGA. All right. And unfortunately, my time has 

expired. I wanted to get to a comment from Jeffrey Lacker about 

markets being better judges of creditworthiness than central authorities, but maybe we will have a round two or one of my colleagues can pick up on that as well. 

So with that, I would like to recognize the ranking member for 

5 minutes. 

Ms. MOORE. Thank you so much, gentlemen, and of course it is 

a pleasure to have you all here. I just want to start with, I think, 

Dr. Levy. This is very sound testimony from you, and I got really, 

really interested in your comments on page 1, 2, 3, 4, where you 

talked about household behavior, and dim expectations of disposable income and so on, people—household spending more money on 

health care, tight mortgage credit standards, and so I guess where 

I am leading to this is some comment or observation on your part 

about the lack of income, of the policies, the austerity policies that 

were put in place here while simultaneously experiencing this 

downturn. 

Do you see that there is any nexus between the tightening—because you say here monetary policy can only do so much, so do you 

see any nexus between the lack of income that people have and the 

inability for our economy to grow? 

Mr. LEVY. So real, or inflation just as disposable income, has 

been growing at a moderate pace, and the data show that people 

are basically spending it, so consumption is growing, once again, at 

a moderate but not a robust pace, and you know, at the same time, 

13 

some government regulations and government mandated expenses, 

particularly in health care, have forced households to allocate more 

of their out-of-pocket spending toward healthcare insurance premiums and the like. 

Ms. MOORE. So just to be clear, you don’t necessarily see $7.50 

an hour as the minimum wage as contributing to the slow growth. 

You see it all being caused by, of course, the downturn in the market, the lack of regulation—I think somebody testified to the lack 

of regulation being one of the causes, so you don’t see the lack of 

income on people’s part as contributing to this? 

Mr. LEVY. My honest assessment is the biggest factor that is inhibiting stronger wage growth is productivity, and I think— 

Ms. MOORE. People are more productive than they have been. 

Maybe, Dr. Johnson, maybe you can help me out here. 

Mr. JOHNSON. So I think the—where you are going with this, 

Congresswoman Moore, is absolutely correct, that the impact of fiscal policy and austerity has been disproportionately at the lower 

end of the income scale. Obviously, income inequality has been a 

issue with us for a long time, and the big question we have, and 

also to the point the chairman raises, if productivity increases, that 

is good, it creates potential for wages to rise, but wages at the 

lower end, incomes at the lower end of the income scale have not 

risenvery much over the past three decades, actually, so there is 

a bigger problem there, and I think that is one reason why raising 

the minimum wage to an appropriate degree would be part of a response that would make some sense. 

Ms. MOORE. And you know, lack of providing adequate monies 

for infrastructure, educational funding and so on. 

Dr. Taylor, I just want to—since you are our distinguished guest 

here, I do want to give you a chance to answer a couple of questions. 

You think QE1 was okay, right, but not the other monetary policy? Is that—did I hear your testimony correctly? 

Mr. TAYLOR. There is sometimes confusion of what QE1 means. 

To me that was the purchases of securities— 

Ms. MOORE. Right. 

Mr. TAYLOR. —in 2009. There was also a big intervention in 

2008, and that is the one, that is the lender of last resort, to firms 

in distress, liquidity operations, and those actually phased out very 

early 2009. It is really after that that I think there was questions 

about the effect. 

Ms. MOORE. Okay. Thank you. I just want to ask, in my last 25 

seconds, back to you, Dr. Levy, fiscal reform versus fiscal stimulus. 

So is it your testimony really that fiscal stimulus would not be an 

effective tool? And this, of course, would be done in Congress, not 

as a monetary policy. 

Mr. LEVY. I would love to see fiscal stimulus, but I think that 

involves more—not just increasing deficit spending that provides 

income support and gooses up jobs in the near term, but increase 

spending, reallocating spending in a way that helps out the economy in less productive capacity. And once again, if you look at the 

whole size of the government’s budget, there is certainly enough 

ways to reallocate, to spend a lot more on things like infrastructure, education, and training. 

14 

Ms. MOORE. Thank you. Thank you, Mr. Chairman, for your indulgence, and I yield back. 

Chairman HUIZENGA. You are very welcome. And with that, I 

would like to recognize the vice Chair of the committee, Mr. 

Mulvaney for 5 minutes. 

Mr. MULVANEY. Thank you, Mr. Chairman. The last time that 

Janet Yellen was here, she and I had a chance to talk very briefly 

about another type of unconventional monetary policy that we 

haven’t discussed yet today, and that is the purchase by central 

banks of actual equities. 

She had given a speech, I asked her a couple of questions, and 

I had a chance to follow up and ask her some questions, written 

questions for the record, and I want to read you, gentlemen, very 

quickly, the three paragraphs in that letter, and also, I would like 

to add the record to the—the letter to the record. 

Chairman HUIZENGA. Without objection, it is so ordered. 

Mr. MULVANEY. This is her response. It says: In my remarks at 

this year’s economic symposium in Jackson Hole, I noted the challenges for monetary policy posed by the effective lower bound on 

interest rates and the possibility that when they face these challenges more frequently in the future, given the apparent decline in 

the so-called equilibrium real interest rate. To address such challenges, I noted that monetary policymakers may again need to rely 

upon unconventional tools such as forward guidance and asset purchases to promote statutory goals such as maximum employment 

and stable rates. 

On the subject of asset purchases, it is important to note that the 

Federal Reserve Act provides authority for the Federal Reserve to 

purchase only a relatively narrow risk—excuse me—a narrow 

range of low risk assets such as Treasury and agency securities. 

The Federal Reserve does not have the statutory authority to purchase a broad range of private sector obligations such as corporate 

bonds, equities, asset-backed securities, or household debt. 

In contrast, other central banks such as the European Central 

Bank, the Bank of England, the Bank of Japan, and the Swiss National Bank have the authority to purchase a relatively wide range 

of financial assets. Moreover, these central banks have utilized 

their authority in recent years in different ways to address severe 

economic shock. 

And she and I went on to talk about the fact that I think the 

Bank of Japan and then I think Swiss bank had actually started 

buying equities. The Bank of Japan, I think was buying ETFs. I 

can’t remember what the Swiss were buying. 

So let’s talk about this other unconventional type of monetary 

policy. We will start with you, Dr. Taylor. Your thoughts on that 

generally. Have you given any specific consideration to this topic? 

Mr. TAYLOR. Well, I think the Fed should stay away from buying 

equity. 

Mr. MULVANEY. Why is that? 

Mr. TAYLOR. Simple as that. Because first of all, it is a form of 

quantitative easing, and it is other things to do with respect to 

monitoring. Monetary policy can adjust its balance sheet to make 

the interest rate move in a desired way without touching equity. 

There is plenty of securities to buy. 

15 

So I think it also goes in the direction of potentially helping certain firms and not others. It is a form of intervention, which is, 

seems to me, not broad based or limited as monetary policy should 

be. You can choose one firm versus another. There is also some 

things that can happen and it is not necessary. 

Mr. MULVANEY. And in fairness to her, she went on through a 

list of advantages and disadvantages, so I couldn’t read the whole 

letter. But when she comes back and if she were sitting here and 

you are having a conversation, and she says: Yes, John, but we are 

out of bullets, we need something else. What would your response 

be? 

Mr. TAYLOR. I don’t think you need anything else. I think we, 

have had a lot of history, we even had ideas about what to do at 

the so-called Zero Bound, which doesn’t require that. It is some indication of what is going to happen after the Zero Bound. There 

has been lots of work on that. There is plenty of other securities 

to buy to set monetary policy. 

Mr. MULVANEY. Dr. Plosser, Dr. Levy, I would curious to know 

your thoughts. As I am not going to get a chance to ask you questions, I would do it in writing, because I enjoy my back and forth 

with Dr. Johnson so much, because he is a really good participant 

in these hearings. 

So Dr. Johnson, I give you the last minute-and-a-half of my time. 

What are your thoughts on this particular unconventional monetary policy? 

Mr. JOHNSON. Well, I think I am going to surprise you, Mr. 

Mulvaney. I think you are asking a very good question, and this 

is the right time to ask it, in a time of peace not— and I agree with 

you. I don’t think—I agree with Mr. Taylor. 

Mr. MULVANEY. I yield back the balance—no, I am sorry. 

Chairman HUIZENGA. The Chair will suspend the clock here because I am not sure we have ever seen a compliment like that paid 

to the vice chair, so— 

Mr. JOHNSON. I am happy to make your day. So I think that, in 

the United States, I would stick with the authority that the Fed 

has, and I think that is what I heard Dr. Taylor said. I can’t imagine circumstances in the United States in which buying equities 

would be appropriate. Other central banks do different things because different market structures, sometimes they feel they don’t 

have enough bonds and so on. I am not going to comment on that, 

you know. 

I don’t think that—you know, what Dr. Taylor—you don’t want 

the central bank to be directing credit, you don’t want to be playing 

favorites, you don’t want to be—you know, I think the Fed is politicized from the outside, as Dr. Levy said. I think they have actually 

retained an impressive degree of nonpoliticalization on the inside. 

If you they get into allocating credit more than they have, that will 

be a problem. 

So just on QE1, if I might. What they did was a specific purchase 

of mortgage-backed securities that were underwritten by or issued 

by Fannie Mae and Freddie Mac, which have been taken over by 

the government. So they have to buy government-backed securities, 

no credit risk, that included those housing securities at that moment. I think actually we are agreed—so that is a slightly uncomVerDate Nov 24 2008 21:06 Mar 08, 2018 Jkt 026006 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\26006.TXT TERI
16 

fortable we should discuss also, but I think what you heard from 

all of us is at that moment, not a bad call given the fog of war that 

they faced, but you know, I think you should push us on that. 

Mr. MULVANEY. Thank you, diligent gentlemen. Dr. Plosser, Dr. 

Levy, again, my apologies, in the limited time I didn’t get a chance 

to ask you, but I do hope to have a chance to follow up in writing. 

Thank you. Thank you, Mr. Chairman. 

Chairman HUIZENGA. The gentleman yields back. And with that, 

we will recognize Mr. Foster of Illinois for 5 minutes. 

Mr. FOSTER. Thank you, Mr. Chairman, and thank you to our 

witnesses here. You know, one of the most important inputs to 

monetary policy is inflation, and there is a strand of debate going 

on in economics right now about whether we are significantly 

mismeasuring inflation in large part by underestimating the technological price reductions and quality improvements or just the existence of products that were not previously available. 

I mean, examples of this are medical care, for example. If you 

give the average person the choice of having today’s medical care 

at today’s prices versus 1970s medical care at 1970s prices, most 

people would choose today’s medical care, which tells you mathematically that healthcare inflation has been negative; whereas, in 

fact, we carry it on our books at 6 percent a year, and that’s, I don’t 

know, 17 percent of the economy, so it is not a small error, if this 

is true. 

There are other things. You know, we carry in our pockets a 

super computer that has a value of tens of millions of dollars in 

1970 dollars and somehow we are not scoring it in a naive way. 

And you know, this drives the debate in a number of things 

when you ask the question is the median family better off than it 

was a generation ago? You know, if you look at the basket of goods 

by the median family a generation ago versus today, you know, I 

think most people would agree it is better off, despite the fact that 

if you look at, you know, the wealth or income of the median family, it is not so good. So that so my questions are this. 

First, you know, do you agree with this narrative that we are actually making a significant error in how we are measuring inflation? And secondly, what are the implications for monetary policy 

if in fact we are not measuring inflation properly? Anyone who is 

up for fielding any part of that. 

Mr. JOHNSON. I think, Mr. Foster, it is a very good point and a 

rather broad and subtle point which affects both how we think 

about inflation and obviously purchasing power, and you are right, 

that where we have—some parts in our consumption basket didn’t 

exist or where it would have been—would have cost a fortune previously, and we don’t take that into account very well. 

I think to the point about monetary policy, which is obviously the 

focus today, this is heuristic that central banks have. There is 

nothing that says that inflation should actually be 2 percent. I 

mean, there is no law of economics or physics. That is a heuristic 

that was developed over a very long period of time where central 

banks feel that at that rate of inflation, you can facilitate commerce, you can have growth, it is consistent with high levels of productivity growth in the past. 

17 

Now, that heuristic may change. I mean, I think this is why— 

I like what John Taylor has said in his testimony, which is the 

Taylor rule is not a hard and fast this is the law. It is guidance 

which Doc Taylor spotted and helped us understand in terms of 

what the Fed did in the past. 

So a good reason not to micromanage the Fed going forward is 

we want to have very smart people there on the board of governors, 

and I am confident that Congress will put smart people—the President will put smart people in there in the next iteration, and they 

need to be thinking about all these issues, including this one, Mr. 

Foster, and think about, okay, how do we continue to operate monetary policy, is it the 2 percent implicit inflation target with the 

dual mandate, which I think works, and other people on the panel 

don’t think it works, but that is a decision I—I mean, Congress sets 

the mandate. 

I think you want the Fed, the board of governors, and the FOMC 

to have the ability to think deeply about these issues. A lot of very 

smart people there, a lot of engagement with the private sector, 

and think about do we have the right way of managing monetary 

policy, do we have the right implementation of monetary policy 

given the kinds of concerns you are raising. 

Mr. FOSTER. Anyone else have—I mean, it was—specifically, if 

we conclude that we are mismeasuring inflation by say 1 percent, 

what implication would that have for monetary policy? I am just, 

I guess, from a straight mathematical point of view— 

Mr. TAYLOR. So I would say, first of all, our measures of inflation 

are—they are different. There is different measures, and it is a 

constant decision for central bank, the Fed to decide which one, 

and so they have gone through it, and we also have statistical 

agencies that worry about the problems you are saying. I am not 

saying they do it effectively, but they try to take into account. 

Given all that, it seems to me monetary policy should take the 

indicators that are there and stick with those. If there is a lot of 

evidence that there is something wrong because of the computer 

technology you are mentioning, then we need to know that. It is 

actually, to me, almost more important a problem for measuring 

productivity. I think productivity growth is very low now. It is distressing. That is why I think we need to actually reform regulatory 

reform. 

Some of my colleagues in Silicon Valley say, no, we are just fine. 

We are doing great in productivity. I don’t think so, but that is 

really, I think, where the productivity issue really comes to be most 

important. 

Mr. FOSTER. Also, the divergence of labor factor, productivity, 

and you know, machine factor productivity is, I think, accelerating 

and will become very significant in our thinking in the coming decades. Any other comments on the inflation issue? 

Mr. PLOSSER. I would just reiterate what both the other panelists 

said. For monetary policy purposes, it is, yes, you need to be aware 

of the mismeasurement, but it is a heuristic, it is a way to commit 

to something, and it doesn’t mean it is the optimal or the best rate 

of inflation. A lot of people would have argued the inflation rate 

target should have been lower, some think they should have been 

higher, but it is a guide to policy, not so much as an objective way. 

18 

I would also point out that if inflation, true inflation is really 

much lower than we think it is, then it means things that we do 

to calculate, for example, real wage growth over the last 30 years, 

would suggest that actually real wages are higher than we think 

they are because inflation has been lower than what we made. 

Mr. FOSTER. Which would change the narrative we see in our 

politics tremendously. 

Mr. PLOSSER. Exactly. Exactly. So you know, I think there are 

lots of—I think we need to distinguish that issue from the issue of 

what is useful for monetary policy purposes, and I think that is 

what John was getting at. 

Mr. FOSTER. Yes. So what you are saying is essentially it is—as 

long as you have a stable definition and you are using it as your 

feedback loop, you know, your— 

Mr. PLOSSER. For monetary policy purposes, that is the critical. 

Mr. FOSTER. But it is still a useful thing to make a stable feedback group. All right. Well, I guess that was my main question. 

Mr. MULVANEY [presiding]. The gentleman’s time has expired. I 

thank the gentleman. I now recognize the gentleman from New 

Mexico, Mr. Pearce for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. I appreciate each one of 

you being here today. John Taylor mentions in his paper, his presentation that maybe the Fed should start selling assets. 

So Dr. Plosser, I think you might be the one who is closest to the 

process. What would happen if the Federal Reserve started selling 

mortgage-backed securities that they purchased back at a time 

when you were in the system? 

Mr. PLOSSER. Well, I think the committee and the Fed was terribly worried about the effect of selling securities into the open 

market. They certainly expressed concern about that. But I think 

that the first step the Fed ought to be taking is not selling, necessarily. I think what they could stop reinvesting would be a good 

practice because, in effect, they are still buying securities in the 

open—buying mortgage-backed security to replace the ones that 

run off just naturally. So I think they wouldn’t have to start selling 

securities immediately. They could just stop reinvesting. 

I would also note that the process of selling securities, now that 

the financial crisis and the functioning of the markets is highly— 

has returned to more normal activities, one of the concerns during 

the purchase of securities was that the markets weren’t functioning 

very well. There was sort of lots of gaps, there were lots of concerns 

about where buyers and sellers were, and some of the trading and 

information in arriving at prices. 

That is no longer the problem anymore. 

Mr. PEARCE. Have all of the valueless MBS’ been choked out of 

the system? 

Mr. PLOSSER. Right. So I think— 

Mr. PEARCE. The ones with no value are gone. They are not— 

they don’t exist anymore? 

Mr. PLOSSER. Well, not many of them, no, but we are still—but 

the Fed is still buying them. So I think there is less of a problem 

now to disrupt— 

Mr. PEARCE. What happened to the ones with no value? I mean, 

I think we—that was at the basis of what caused the collapse. 

19 

Mr. PLOSSER. Right. 

Mr. PEARCE. Valueless loans that were made across the country— 

Mr. PLOSSER. The Fed was buying— 

Mr. PEARCE. Secured by and put in—so what happened to them? 

They just vaporized? What, I mean— 

Mr. PLOSSER. Well, some of them restored some of their value. 

The Fed was busy trying to make a market. 

Mr. PEARCE. So they have achieved some value. 

Mr. PLOSSER. So they have achieved— 

Mr. PEARCE. Dr. Levy—I mean, Dr. Levy, I was interested in 

what your perception is on the answer to Mr. Mulvaney’s question. 

I looked back several years ago, and the State of Ohio started buying assets. They got into buying coins, chasing yield, trying to find 

anything they could do, and so this idea of buying assets is one 

that is concerning, and then when you look at the CalPERS, I 

think the Chairman Huizenga mentioned them, all of the pensions 

are going to be chasing yield because they are promising payouts 

based on totally false assumptions that they can make 6 to 7 percent in the market, so they are paying out to the recipients. 

So I would like your observation on what chairman—or what 

Vice Chairman Mulvaney asked about the process of buying assets 

and stocks. 

Mr. LEVY. Well, let me just address your first point. 

Okay. So the Fed has, through its QE programs increased excess 

reserves in the banking system up to about 2-1/2 trillion and the 

Fed’s balance sheet is nearly 4-1/2 trillion, and it has kept rates 

artificially low. And this has create the distortions. And now as I 

think the Fed begins to normalize, particularly, I believe, there is 

an economic regime shift underway and rates are going to rise, 

there is going to be pain. 

But during the period of low rates, it has forced insurance companies, pension funds, and the like to, you know, reach for yield, 

take on more risk than they would otherwise. And there is a downside of that that we are going to face now. 

Now, with regard to QE, should the Fed be buying stocks? Absolutely not. For what purpose? Do you want the stock market to go 

higher? And as Dr. Johnson said, do you want the FOMC members 

to deliberate on which companies to boost? It makes no sense. 

And all of the excess reserves and low rates have not stimulated 

aggregate to manning the economy the last 5 years. So for what 

purpose? 

Mr. PEARCE. Isn’t that a process they have moved into in Japan 

and isn’t that one of the causes of trouble? Again, I will just yield 

to you, Dr. Levy. 

Mr. LEVY. When we look at Japan, let’s call a spade a spade. 

The central government runs a very large budget deficit, very 

large, and primarily to finance retiree pensions, and they don’t 

want it to show up in their general—as an increase in the outstanding debt, publicly held debt, and so they use the Bank of 

Japan, and they stuff—the BOJ, through its QE, buys more than 

100 percent of the increase in the debt. And so the BOJ buys JGBs 

and it buys corporate bonds and it buys ETFs. It is all a financial 

shell game. And it is the poster boy for what we should avoid. 

20 

Mr. PEARCE. Which, again, gets towards my concern that some 

of what we are doing appears to be a shell game in a lot of ways. 

I yield back, Mr. Chairman. 

Chairman HUIZENGA. The gentleman yields back, with that, the 

Chair recognizes Mr. Heck of Washington for 5 minutes. 

Mr. HECK. Thank you, Mr. Chair. I have question for Dr. Johnson, before I ask it, with all due respect, sir, I just thought I might 

point out you referred to Congressman Foster as Mr. Foster. He, 

in fact, has a Ph.D. In theoretical physics from—I grant you it is 

only Harvard, sir, but he likes to remind people that he is the sole 

remaining actually scientist in the United States House of Representatives. Point of future reference is all, Dr. Johnson. 

Mr. JOHNSON. It says Mr. Foster in his name tag, so you should 

see if you can have that changed. 

Mr. HECK. Point well taken. 

So, Dr. Johnson, I have been on this committee and in this body 

for almost 4 years now, and I have tried to be an unwavering advocate for increased spending on infrastructure to not just stimulate 

the economy but to stimulate growth over a long period of time, a 

little bit lay foundation for increased productivity. I have even gone 

so far as to encourage then Chairman Bernanke to consider using 

their tools to help with infrastructure spending by municipalities. 

He said they didn’t have the authority. That, despite the fact, by 

the way, that they actually did exactly that when metro was built 

here several decades ago. I also suggested to him that is what they 

were doing with QE in the housing market. He denied that. I take 

a different conclusion out of the net effect of that particular activity 

on the part of the Fed. 

But here is what I am struck by: I try to get Chairman Bernanke 

to do it. I have had this conversation with Chairperson Yellen. And 

I have encouraged all of my colleagues to step up to an increased 

infrastructure spending bill. We did the FAST Act, which was very 

modest, frankly, very modest compared to what I think the need 

is. 

But that was when unemployment was 8 percent. And unemployment now is 4.6 percent. And an awful lot of the same people that 

resisted aggressively, increased expenditures on infrastructure 

are—have now come around to be an advocate for it. 

And so my question to you, Dr. Johnson is, why would increased 

spending on infrastructure be a bad thing when the unemployment 

rate was 8 percent but a good thing when it is 4.6 percent? I do 

not understand that. 

Mr. JOHNSON. Well, Congressman, I think the main case for infrastructure, which I think is physical infrastructure, transportation, schools, and the human capital infrastructure, which is everything else around the way we train people, I think it is hugely 

important for productivity growth. You know, in the parlance of the 

IMF, you know, it is medium term objectives that you should have 

fiscal policy. I think that is exactly what you have been saying. 

Now, there is an additional argument for fiscal policy if you 

think that monetary policy is limited in its effectiveness and the 

economy, the private commercial part of the economy, needs some 

additional help. And I think that was a good argument at 10 percent or 8 percent unemployment. That piece of the argument, is I 

21 

think, weaker now. But the medium term argument is incredibly 

strong. In fact, we are, I think, agreeing that there are big medium-term issues, and I would certainly get at them in this way. 

Now, if the question is alluding, as I think it may be, to what 

President-elect Trump has said about infrastructure and what appear to be the plan to materializing, I am not confident, Mr. Heck, 

that that actually is infrastructure spending of the kind that you 

are invisioning and that I just stated. I think it may be some different form of tax breaks of some kind either for existing infrastructure projects or for some other projects that will end up being 

more expensive and will get less effectiveness out of them compared with doing it through Congress. 

I would emphasize, though, and I think we are all agreeing on 

this, that fiscal policy infrastructure is responsibility of the fiscal 

authority, which is the Congress in the United States acting 

through the executive branch. It is not the responsibility and 

should not become the responsibility of the Federal Reserve. 

I take your point about the metro. I wasn’t—I don’t know how 

they did that one, but— 

Mr. HECK. What about my—what about my QE? 

Mr. JOHNSON. So what they do in QE, and this goes back to the 

point— 

Mr. HECK. Was is it not in effect a stimulus of the housing market indirectly? 

Mr. JOHNSON. Yes, Mr. Heck, it was. But this is back to our point 

of violent agreement among ourselves and with Mr. Mulvaney. QE1 

was targeted at a specific breakdown in the mortgage-backed security market. That was hugely important to housing, to house 

prices, and for reasons you all understand, the financial sector and 

the economy. So in that fog of war moment, it was a good call. And, 

yes, it was a specific target— 

Mr. HECK. Okay. My point isn’t—my point isn’t that they should 

embark upon this journey, although I have made that point in the 

past. My point was—and I take from your remarks, it was a good 

idea to increase our investment in infrastructure at 8 percent unemployment, it is a good idea to do it at 4.6 percent if it is done 

the right way— 

Mr. JOHNSON. Yes. 

Mr. HECK. —especially with an eye toward long-term growth and 

increased productivity where he can gauge it? 

Mr. JOHNSON. Absolutely. 

Mr. HECK. Fair enough? 

Mr. JOHNSON. Yes. 

Mr. HECK. I see I am close to being out of time. I am given to 

believe that we may have a second round. So maybe I will have another chance to get into auction here with you all. Thank you all 

for being here very much. 

With that I yield back, Mr. Chair. 

Chairman HUIZENGA. The gentleman yields back. 

With that, I will recognize Mr. Schweikert of Arizona for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

One of the problems is a lot of the really interesting questions 

have already been part of the exchange. Can we all have an agreeVerDate Nov 24 2008 21:06 Mar 08, 2018 Jkt 026006 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\26006.TXT TERI
22 

ment, though, that expansive monetary policy does enable those of 

us who are responsible for fiscal policy, it sort of indemnifies us 

from doing things that are hard, are controversial, are sometimes 

ideologically hard to explain. So I am not even asking that. I am 

just sort of saying it. 

Can I walk through a handful of things? And There is one just 

because Mulvaney and I have talked about. And I am just curious. 

So this one, Dr. Johnson, if we were to talk about sort of nonconforming monetary policy that would be within the rules of the U.S. 

Federal Reserve, let’s say we will talk about, like during the type 

of QE1, could they have bought the lost piece of an MBF 

securitization instead of buying the entire securitization? It is just 

a quirky idea I have often wondered about. Would that have also 

been a way to change the bandwidth of the exposure for investors? 

Mr. JOHNSON. They are not allowed to take credit risk. And then 

they are only allowed presumably to buy government guaranteed 

securities, which in normal times means treasuries, but after 

Fannie and Freddie were nationalized, that included the agency securities. So I think the answer would be if you are just talking 

about, you know, picking and choosing within the Fannie and 

Freddie securitites— 

Mr. SCHWEIKERT. Let’s say, if Fannie, you know—a nationalized 

Fannie Mae selling— 

Mr. JOHNSON. Perhaps. But what they did was much smarter 

than that, Congressman. What they did was they bought new 

issues. That was the pipeline that had broken down. And they targeted the QE1 on enabling that process to restart. So think of it 

like a kick start or cranking the engine. Right? And that I think 

was a good use. And to do that, you would really be buying the entire issue, not picking and choosing within the issues— 

Mr. SCHWEIKERT. Okay. So one side it would be an approach for 

what is collapsing, the other side would be keeping the channel 

healthy? Or at least keeping it healthy? 

Mr. JOHNSON. Yes. Ongoing or restarting it. 

Mr. SCHWEIKERT. And this may be more for Dr.—is it Levy or 

Levy? If I came to you right now and said, what is our greatest exposure for a difficulty that could happen in our markets right now? 

If interest rates start to move upward, simple example I can give 

you is, just the other day I was looking at a number of nonpublicly 

traded REIT’s that were paying some fairly healthy rates of return. 

But if you looked at the underlying asset, they were varied interest 

and sensitive, tenant sensitive, those things. Are we headed towards a moment where the next economic difficulty we see is as 

interest rates are moving away from us, that the cap rate compression that we have had now starts to move against them and all of 

a sudden we once again have another great difficulty in parts, 

whether it be commercial real estate market, these nonpublicly 

traded REIT markets, what is our next rate exposure you see on 

the horizon? 

Mr. LEVY. Well, there is certainly a risk, because after keeping, 

rates really, too low for too long and pumping so much liquidity 

into financial markets and encouraging risk taking, global portfolio 

managers base their investments on that framework, and now 

23 

things are going to change and there are going to be some losses 

along the way. 

Now, I would point out that the interest rates have increased 

rather significantly in the last couple of months, particularly post 

election. I would say that is healthy, because you actually want rising real interest rates reflecting healthier expectations for the future. 

Mr. SCHWEIKERT. I guess my concern was just being—our brothers and sisters being sort of emotionally prepared that we do have 

a lot of misallocation in the capital, you know, yield chasing and 

some of that is going to have some difficulties as the rates move. 

Mr. LEVY. And I would say the answer to that is yes. You just 

cannot do what the Fed has done the last 7 years and expect there 

to be no eventual unwind. I think the offset to that is if, in fact, 

we do get economic reforms, raised—not just temporarily, but 

raised potential growth, then there is a very, very positive offset. 

Mr. SCHWEIKERT. Let’s—and we won’t have time for this, but I 

am hoping if we get to a second round, we have a discussion sort 

of that is one off from sort of the monetary and those are of us who 

are fixated that there has been a massive misallocation of capital 

not going through its most productive allocation. 

But what would you have us do from a fiscal policy that would 

maximize productivity gain? Because I think that is something we 

all agree there is something wrong out there for the last decade 

and our productivity numbers. 

And with that, I yield back, Mr. Chairman. 

Chairman HUIZENGA. The gentleman yields back. 

With that, we will recognize Mrs. Love of Utah for 5 minutes. 

Mrs. LOVE. Thank you. Thank you, Mr. Chairman. 

Thank you, the panel, for being here. 

This has been really just a great, a great panel, and it’s been— 

given me quite a bit of insight. So I guess I am just going to explain what I have heard and then get your comments on what you 

think, whether you think that this is—if I am getting it correctly. 

So one of the comments that was made by Dr. Levy, which I 

think is right on, is a clear explanation, by the Fed, of the monetary policies and the factors that have contributed to the lower potential growth, weak capital spending, and productivity, and structural unemployment would help steer the economic policy debate 

towards the issues that really matter for performance. I think that 

that hits the nail on the head. 

So if I look at where we were at the beginning, 1913, versus 

where we are today, where the Fed was involved in dollar stability, 

low inflation, bank oversight, to 2016 where its inflation, full employment, expanded bank holding companies oversight, FSOC, you 

name it, a whole host of responsibilities that have been put on the 

Fed’s table responsibilities. We talk about the CFPB, we talk about 

all of these other arms that really start to effect the economy and 

how everything is run. I start thinking about what is happening 

today. And the frustrations of the American people today is not 

really the responsibility or—should be reflected towards the Federal Reserve. It should be towards Congress. 

If you think about the whole—when we think about what the 

panel is saying and a whole host of things that the Federal Reserve 

24 

is dealing with right now, the fact that this body today is made up 

of mainly Republican—of mostly Republicans, also the Senate, and 

the White House is a reflection upon the frustration of the American—that the American people have today. 

So I believe that it is not about what the Federal Reserve is 

doing, but it is about what the House of Representatives, what 

Congress is doing altogether. And that we have literally said we 

are not going to take the responsibilities of the economy, but we 

are going to put it on the table in the hands of the Federal Reserve. 

And I think that it is time for us to decide what the Federal Reserve is responsible for and what we are willing to take responsibility for. 

I am going to give a short example, and then I want you to explain, to tell me if I have it right. So if I look at my home, and 

I have a child, for instance, that is sick, that has a fever. My job 

is to go into the cupboard. I grab Tylenol, and I decide what the 

best dosage is for the right age of that child and give that child the 

right dosage. And when I look at what the policies of Dodd-Frank 

and all of these other things, the responsibilities the Fed have, I 

feel at this time right now we have literally taken the entire bottle 

of Tylenol and given it to the child, where now we have all sorts 

of problems that we are trying to adjust and we are trying to fix, 

and it is not working. 

So I just want to get your thoughts on that and tell me if we are 

on the right track and what we need to do as a body to make sure 

that we are gaining—we are taking back the reins, to what happens, our responsibility to what happens in this economy. 

I did quote you, so Dr. Levy, I was wondering if you could comment on that? 

Mr. LEVY. All I can say is great comments. And I really appreciate that. Because I think what is needed when we look at the 

challenges facing the economy—and let me just point out that 

2007, both the Congressional Budget Office and the Fed estimated 

potential growth to be 2.6. And now the Fed is down to 1.8 and the 

CBO is at 2.0. That is dramatic change. 

Mrs. LOVE. Right. 

Mr. LEVY. So what policymakers need to do is think about the 

challenges and what are the true sources of the economic weakness 

and address them with the correct policy tools and not just rely, 

as it has recently, on the Federal Reserve. 

Mrs. LOVE. You have a comment—I just wanted to make sure I 

got a comment on both sides. 

Dr. Johnson, do you have a comment on that? 

Mr. JOHNSON. I think, Mrs. Love, you put the problem well. And 

I agree with Mr. Levy, productivity growth is lower in these estimates, and that is not acceptable. You know, I guess the good news 

for your side is you get—you are in charge. Right? You have all the 

branches of government, and you are going to make the policies. I 

am skeptical that you are going to have the sorts of positive effects 

on growth that Mr. Levy thinks, but go ahead, do it, and we will 

be measuring it carefully and be evaluating it on that basis. 

I do think, though, you want to be very careful with financial 

stability, because it has been a good question for our economy for 

a long time. You talk about the formation of the Federal Reserve, 

25 

and you should think very carefully what you want Congress to be 

responsible for. I would not—maybe you don’t want the Fed to do 

it, fine. You need some responsible body— 

Mrs. LOVE. But there is a balance. There is a right—it is getting 

the right balance? 

Mr. JOHNSON. Absolutely correct. Yes. 

Mrs. LOVE. Thank you. 

Chairman HUIZENGA. The gentlelady’s time has expired. 

And at this point, we would like to welcome Congressman Hill 

from Arizona, who is not a regular member of the committee, but 

I am sure—I am sorry. Yes, sorry. I believe I said Arizona, but Arkansas. But I would like to thank Mr. Hill. It was a conversation 

that he and I had had that really prompted us to put together the 

panel in this hearing. 

With that in mind, I would welcome you to the subcommittee and 

recognize you for 5 minutes. 

Mr. HILL. I thank the chairman. I appreciate the opportunity to 

be a guest today for the hearing. I appreciate the panelists being 

here. 

And despite my affection for Mr. Schweikert, I am completely delighted that I don’t live in Arizona. 

Mr. SCHWEIKERT. Hey. 

Mr. HILL. I knew that would get your attention. 

I want to start out and ask about—we have had a lot of discussion—I appreciate Mr. Mulvaney bringing up the subject of nontreasury purchases, the limitations in section 14 on open market 

operations. 

Would it be beneficial for the Congress to amend section 14 and 

explicitly restrict the Fed from buying corporate securities? It is 

left open, and in this world of chevron deference and lawyers in 

Washington, I have concerns that open market operations could be 

expanded just by clever lawyering at the Fed. 

Dr. Taylor, what is your view on that? 

Mr. TAYLOR. I think it would be a good idea to clarify. There 

seems to be an opinion that they would find it difficult to do now, 

but I think it would be better to clarify it for the reasons you said. 

Mr. HILL. Well, in her testimony, Chair Yellen dodged the question here, but then a week later, on September 29, gave a speech 

to the Kansas City Fed where she said, there could be benefits to 

ability to buy either equities or corporate bonds. They would have 

to be weighed carefully. And she said in her view, that the Fed 

does not have the authority to do that without Congress changing 

the law. But if you read a lot of legal precedent around the city, 

I think that could be argued. And so that gives me great concern 

that we would follow these other central banks. 

Dr. Plosser, you want to add to that comment? 

Mr. PLOSSER. I would agree. I think it would be beneficial. The 

Fed, by its nature and history, you know, always prefers to have 

the option and the discretion to do what they think is the right 

thing at the right time, and those intentions are often good. But 

what discretion also does is allow you to do the wrong things at the 

wrong time. And so I agree with Dr. Taylor. I believe it would be 

useful to be more explicit about what the Fed can and can’t do than 

leave it to discretion. 

26 

I think the discussion of the Fed buying equities is a dangerous 

one. There are other central banks around the world that do it, do 

it for different reasons, there are institutional reasons. The ECB, 

for example, has to respond to 17 different governments. So if you 

confine them to only government securities, there is a whole big political debate on which country you prefer and which one you don’t, 

and so it gets them out of a different set of institutional problems. 

So I think it would be beneficial. I agree. 

Mr. HILL. You have also—in your testimony, you talk about during the crisis and the recession, the Fed purchased distressed securities under 13(3) and that such actions were a form of credit allocation, fiscal policy. 

Dodd-Frank partially addressed the issue of discretionary lending under 13(3), but you said you would go further. Could you talk 

about how you would go further? 

Mr. PLOSSER. Yes. Back in 2009, I first started talking about 

this, is that I think that 13(3), again, was a loophole, if you will, 

or it is a thing you can drive a truck through. It is a form of fiscal 

policy. I don’t think the Fed’s role is to buy distressed securities 

and bail out individual organizations and, yet, 13(3) allowed that. 

Congress did address that by restricting 13(3) to be broad-based 

programs that didn’t—weren’t targeted at any one company. But I 

think that, again, all of us know that there are ways to write an 

action that sort of really is targeting, even though it doesn’t sound 

like it is targeted. 

My preference, though is that we really do need what I have 

called a new accord about financial crises and about the role that 

the Fed plays in them, and particularly when it comes to purchasing private sector securities, whether it be equities or whether 

it be under 13(3). And that accord, from my mind, is to sort of keep 

the Fed—and I alluded to this in my remarks, keep the Fed from 

engaging in discretionary fiscal policy actions, that there needs to 

be expanding, that is up front, an agreement about how such a circumstance would work. And I call that a new accord. 

And what that does is, it would work something like the following: Suppose there really was a crisis—and we did have one. We 

had a crisis with AIG; and we had a crisis with Bear Stearns. In 

those types of environments, things do happen, and you have to 

make tough decisions. So what I would recommend is that the Fed 

not be given the authority to buy those, particularly, distressed securities in a crisis. That is not monetary policy. 

What should happen in my view is that there should be an 

agreement in advance that under those circumstances, under a crisis like that, it is the fiscal authorities, in this case would be the 

Treasury, let’s say, make that decision and determine, perhaps in 

conjunction with the Fed’s consultation, about what to do. And if 

that was decided that was appropriate, from a fiscal and financial 

stability point of view, that the Fed certainly could be instructed 

by the Treasury to actually conduct an operation on very short notice, but, and here is the key, but those securities that were acquired during such an emergency would then be swapped by the 

Treasury for U.S. Treasury securities that would be given to the 

Fed in exchange for the private sector securities or distressed securities that were actually purchased. That way it becomes clear that 

27 

that action has the responsibility of the fiscal authorities in making 

a fiscal decision, and the Fed would be given the treasuries in exchange, and they could go about conducting monetary policy as 

they saw fit. 

Mr. HILL. Thank you. Mr. Chairman. 

Chairman HUIZENGA. The gentleman’s time has expired, and let 

that go for the salient point. 

With that, I would like to recognize the vice chair—I am sorry— 

the ranking member of the committee, Ms. Moore, for 5 minutes. 

If it is okay with you all, we would be entering into a second— 

second round here. 

Ms. MOORE. Thank you for your generosity of your time, gentlemen. 

I wanted to ask this during the first round, but my time didn’t 

allow it. 

Dr. Taylor, you—in your testimony on page 3, you talk about the 

importance of monetary normalization, and you talked about it in 

the context of the international community. You said that unconventional monetary policy, so the near zero policy rates have 

spread internationally. And so you say that if United States—if we 

normalize and have a rules-based approach, that this would spread 

as well. I have a couple of questions. 

Number one, do you think it would be a greater possibility of 

kind of gaming the system if people sort of knew that we had this 

rigid policy that wasn’t flexible with changes, and what makes you 

think that we can, you know, what evidence do you have that if we 

were to, you know, given that we sort of poisoned the well with our 

monetary policy, should Europe and other central banks not have 

done what we did? 

Mr. TAYLOR. So I think there is lots of evidence that the unusual 

policies spread, and there is various reasons for that. The low interest rates, other central banks are worried about their exchange 

rate, and so they will tend to— 

Ms. MOORE. I mean, should they have done that? 

Mr. TAYLOR. Well, one of the questions is whether they overdid 

it or not. But if we had had, in my view, a more normal rules-based 

predictable policy, the likelihood of that diminishes a lot. In a way, 

the United States is being more transparent about its policy, and 

that leads other countries to do the same. So that is what the research says. I talked to many of these heads of central banks about 

it. That is my sense, and it would be conducive to a more rulesbased international monetary system if we had a more rules-based 

monetary policy. 

And so I think there is discussion about that. It is not clear how 

it would work, but that is how I—from my research and from talking to many people in central banks around the world, that is my 

sense about— 

Ms. MOORE. Your comment on that, Dr. Johnson? 

Mr. JOHNSON. Well, again, if FOMC decided to follow a rule of 

the kind being proposed, that is fine with me. I don’t think Congress should be micromanaging, that is the bottom line. In terms 

of—I mean, the U.S. is clearly a leader, thought leader among central banks, with whom I have also worked extensively. You know, 

the Europeans have a very difficult set of problems. I don’t think— 

28 

and Dr. Plosser talked about, you know, how that impacts what we 

can do and can’t do in terms of monetary policy. 

I don’t think that us changing—going to a more rules-based approach would have a big impact. Japan has a long very, very deep 

structural issues. Dr. Levy has talked about those. Again, I don’t 

see exact parallels. 

The British have trapped themselves in an extremely bizarre and 

difficult situation, again, very different. So I wouldn’t—I think the 

discussion which we are having is a very good one about the U.S.— 

what is good for the U.S. economy. I think the impact on the rest 

of the world would be pretty second or third order. 

Ms. MOORE. I agree. 

Dr. Taylor, I want to ask you another question. You have been 

an—you have been a critic of intervening in markets. So I am curious as to what your thoughts are about President-elect Trump’s 

intervention in Carrier and now threatening Boeing. Do you think 

that that is—what would your advice to President-elect Trump be? 

Mr. TAYLOR. Well, I don’t know the details of either of those 

cases. What I would say is that with respect to making the U.S. 

an attractive place to invest and stay here, that is the key. And to 

me, there are opportunities for that, and that is regulatory reform 

and tax reform. 

We talked a few minutes ago of where monetary policy would 

play. I think there is a sense in which if the Fed is viewed as 

some—an organization which will take care of all of our problems, 

interventionists perhaps, and that reduces the chance for these reforms, like the regulatory reform and the tax reform. So I am quite 

optimistic now, that especially if you get some monetary reform, 

will move in that direction. And that is really what I would argue 

we should do in these cases. 

Ms. MOORE. Versus interfering in that way? 

Your thought on that, Dr. Johnson? 

Mr. JOHNSON. Well, if we apply Dr. Levy’s sensible principles 

that, you know, generating uncertainty and if you confuse about 

what is going happen is a problem, then you shouldn’t, up should 

not absolutely use presidential authority to mess around with individual companies. 

Ms. MOORE. And so, Dr. Taylor, I do want you to be on the record 

saying that you don’t think we should do that. 

Mr. TAYLOR. Well, I say what we should do is make this country 

an attractive place to invest. That is what we should do. How you 

do that is a question. I think it is regulatory reform. I think it is 

tax reform. I think it is a lot of reforms. You mentioned education, 

there are a lot of things in education to do. All those things make 

our country more attractive place to invest, more attractive place 

for job creation and for higher incomes and productivity. I think it 

is pretty straightforward. Hard to do, but that is what we should 

do. 

Ms. MOORE. Thank you. 

Chairman HUIZENGA. The gentlelady’s time has expired. So at 

this point I will recognize myself for 5 minutes, and I do—if I have 

time let, I want to come back to Dr. Johnson’s discussion of the Fed 

rule. 

29 

Dr. Levy, I want to start with you and also hit Dr. Taylor. Your 

statement notes that, ‘‘The Fed’s fully discretionary approach in 

conducting policy highlighted by its ever-changing explanations for 

delaying rate increases adds confusion, and it has created a very 

unhealthy relationship with the financial markets.’’ 

In light of your statement, Dr. Levy, can you please share your 

opinion about whether the Fed could do a better job by referencing 

a more principled policy strategy and providing a more accessible 

explanation of how the FOMC decisions depend on data rather telling us in plain English what data matter, and why they, and how 

they matter, and would measures like these help us safeguard 

monetary policy independence and help goods and services, which 

obviously includes labor as well, find their most productive employment? 

Mr. LEVY. The Fed has created an extremely unhealthy relationship with financial markets. It not only bases its actions but also 

bases what it says on how it thinks the market is going to respond. 

And the markets respond and think about what the Fed is going 

to say. And when you get to the point about data dependence, you 

come in and you see another Fed member gave a speech on something, and they said they are data dependent. You say, what is 

that? And the honest answer is it is anything they want it to mean. 

And that is not the right way to conduct policy. 

So I think what the Fed should do is move towards a flexible 

rules-based monetary policy framework and, in particular, de-emphasize short-term financial fluctuations and economic fluctuations. 

That comes. That comes with the territory. Stay away from that, 

and move—and look to the long run and base policies on the long 

run. And absolutely change its communications and its official policy statements toward achieving its long-run objectives and away 

from day-to-day fluctuations in the markets that it can’t do anything about and has no impact on the economy at all. 

Chairman HUIZENGA. Dr. Taylor, you care to comment on that? 

Mr. TAYLOR. Well, basically, I agree. I couldn’t put it any better 

than what—he says it is flexible rules-based. I think rules-based 

should be flexible, just to clarify. 

Chairman HUIZENGA. Well, I do too, which means maybe we 

weren’t as clear in format as we would have liked. But I at one 

point in the hearing dubbed it the Yellen rule. They can set whatever, you know, guideline that they would like. It is just having 

some sort of guidepost to reflect upon. And I guess that is—Dr. 

Johnson, your quote that I wrote down here, roughly is—I guess it 

wouldn’t be a quote—roughly I wrote down, if the Fed cares to 

adopt a rule, fine, but Congress should not mandate a rigid rule. 

And I don’t think I would disagree with that. I don’t think that the 

rest of the panel would disagree with that, but I just want to give 

you a moment to address that if you would like to. 

And then I do want to very quickly, in my remaining time, Dr. 

Levy had answered this, but I would like to hear about the 

politicization of the Fed, and he is addressed that a couple of times. 

So go ahead. 

Mr. JOHNSON. So I like what Dr. Plosser is saying on this issue, 

and he has been a member of the FOMC, and I haven’t. Flexible 

rules-based is a little bit of an oxymoron but not really. And the 

30 

Fed has actually improved its communication in transparency a lot 

since, for example, 1990. The second half of the 1990s Ben 

Bernanke did a lot when he was also chairman. I think it is really 

hard to legislate that, Mr. Chairman. And I worry that it goes with 

all the best intentions, it will become micromanagement and too 

much control. 

I think you want to have this kind of discussion. This is very 

helpful. Put good people on the board of the Fed and the FOMC 

and let them figure out how to improve communication and transparency, which is what— 

Chairman HUIZENGA. Will they do that without a legislative 

nudge? That is the question that I have, and I haven’t been convinced of that. 

Mr. JOHNSON. I think—you get—I think the Republican administration and Congress will appoint most of the members of the 

board of governors, and we will see what happens to the FOMC 

over the next number of years. But I expect you will— 

Chairman HUIZENGA. As we have learned, elections are not predictable, and there are changes. And I want to make sure that 

what is belt and suspenders in one administration is belt and suspenders on another. And that is really the purpose. 

So, Dr. Taylor, real quickly, and Dr. Plosser, you haven’t had a 

chance to discuss the politicization of the Fed. 

Mr. TAYLOR. You know, I think this idea that the Fed sets its 

strategy, its rule, that is its job. It communicates what it is explicitly. If it deviates from it, it says why. Is it done through hearings, 

it creates a much better process. And, you know, individuals can 

make a difference, but this is beyond individuals. We have had 

over 100 years of experience, and it would be a great value in 

terms of how the Fed operates, how the Fed operates with its staff, 

with its researchers and the decisionmakers and how it discusses, 

not just to you but the American people generally about what it is 

doing. It would be far better to have a description of what it does, 

and I don’t think it is as hard as people think it will be. 

Chairman HUIZENGA. Okay. 

And my time has expired. 

With that, I recognize the gentleman from Washington, Mr. 

Heck, for 5 minutes. 

Mr. HECK. Thank you, Mr. Chairman. 

This is for any of you. It seems as though most, if not all of you 

argued against using unconventional monetary policy in the future, 

presumably to rely more on the traditional means, the overnight 

lending rate or whatever. 

And I am wondering if you believe as well that that implies that 

the Fed ought to have a higher inflation target? And the reason 

that I ask that is that the Fed’s current inflation target is about 

3 percent and, yet, in fact, in past recessions—and we should all 

acknowledge that God has not outlawed the business cycle. We are 

going to have another recession at some point. The Fed has typically cut by more than 4 percent. 

So do you believe we should have a higher inflation target so 

that the Fed has a bigger buffer so that they can avoid using QE, 

which you seem to say is a bad thing to do? Anybody. 

31 

Mr. TAYLOR. Well, I just—I don’t think the Fed should raise the 

inflation target. There is something there to be said for keeping it. 

One thing it would probably prolong these unusual policies, but 

it is fine. Sometimes we—since this was instituted, it is sometimes 

taken as a reason to gun things just because the inflation rate is 

1.7 rather than 2, so that should be looked at to some extent. These 

are—inflation rates that are measured with some error. But I see 

no reason to be raising the inflation rate target. 

Mr. HECK. So what leads you to conclude that they won’t need 

the same latitude for reduction in interest rates that they have 

typically utilized to combat the recession? 

Mr. TAYLOR. So one of the rationales for raising—that people 

make, for raising the inflation rate is that for some reason the 

equilibrium low interest rate has changed, declined, and so there 

is less room for policy to move it down. I think that is quite questionable. I know there are a lot of people who think that. If you 

look at the Fed’s forecast, they have ratcheted that down by a percentage point over the last 3 years. 

When I look at the U.S. and the world, I don’t see evidence for 

that. And, in fact, I think to some extent the backup in long-term 

rates over the last month or so is some evidence there is not just 

simply a low equilibrium interest rate as the Fed describes it. So 

I don’t think there are reasons for that. And also, we have had 

much experience about how to manage monetary policy at this 2 

percent inflation target. There is also an international aspect. Most 

of the countries are in that same region. And so with respect to stability of the overall exchange rate system, it is a subvalue to have 

a common inflation target. If anything, maybe in the future when 

we get better measures, it should be lower. But I think it is fine 

right now. 

Mr. HECK. Dr. Johnson? 

Mr. JOHNSON. Mr. Heck, I agree we shouldn’t lower the inflation 

target. I think it is 2 percent, roughly speaking. 

But, I think you hit a really important nail on the head. It goes 

to what Mr. Huizenga was saying, which is about, you know, what 

should Congress decide and what should be in legislation? So if 

monetary policy is gong to run out of bullets or conventional monetary policy is going to hit this zero interest bound on a regular 

basis, which is what you are saying, and I agree, and if we agree 

that unconventional monetary policy is only appealing in very, very 

specific circumstances and probably isn’t much use over a regular 

business cycle, then what should we be doing when the economy 

turns down by that much? Well, I think—thinking about the legitimate—and so Dr. Plosser is calling for a new accord. I think a new 

accord broadly constructed would include Congress thinking about 

the use of fiscal policy for countercyclical purposes. 

And I would remind you, Mr. Chairman, that in early 2008, 

President George W. Bush proposed, and there was a lot of Republican support for and Congress passed, a tax cut for countercyclical 

purposes. Early 2008 right? So before Bear Stearns. That was a 

good idea. Well done. 

That was a good idea, use of countercyclical fiscal policy, in a relatively moderate way. Yes, in retrospect, perhaps too small. But it 

was a good idea—I mean, we have somehow developed or you deVerDate Nov 24 2008 21:06 Mar 08, 2018 Jkt 026006 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\26006.TXT TERI
32 

veloped this aversion to any countercyclical use of fiscal policy. I 

don’t think that is a good idea. I think that there is a measured 

use for it, and that is where Mr. Heck is going with his question. 

Don’t rely on the central bank to save the day, because they will 

not be able to, necessarily, next time. 

Mr. HECK. So my favorite personal characteristic is humility. I 

don’t have much time left. But I am wondering if any of you would 

be willing to put yours on display by acknowledging that you argued in advance of the use of quantitative easing, or during it, that 

it would lead to inflation, which we have not yet experienced. And 

if so, if you are willing to admit it, if you would also tell me why 

you were wrong. 

Dr. Levy, are you admitting you are wrong, sir? 

Mr. LEVY. Yes. And—so, typically, when you move to QE and 

there is tremendous liquidity and you leave rates too low too long, 

it generates excess demand in the economy, and that has not happened. Where I was wrong is the Fed’s excessive ease did not 

translate into excessive bank lending and acceleration of nominal 

GDP relative to productive capacity that would have boosted wages 

and inflation. 

Having said that, beginning with QE3 in the summer of 2012, 

this just was clear to me, even if inflation didn’t rise, that the distortions created by the Fed’s QE and forward guidance were going 

to be very costly, and I think we are going to bear out those costs. 

Back to your earlier point on the flexibility of monetary policy, 

should there be a recession I don’t— 

Mr. HECK. Should there be? Sir, don’t you mean when there is? 

Mr. LEVY. There will be. I don’t think you would be having those 

same concerns now if, over the last couple of years, as the 

economyis growing along its potential path, that the Fed would 

have normalized rates. And so as Dr. Taylor said, if the Fed had 

normalized, history suggests it would have had no negative impact 

on the economy, and real interest rates would be higher and the 

Fed would be having that much more flexibility than it is now perceived to have from the vantage point of where our rates are now. 

Mr. HECK. I would acknowledge hindsight is a wonderful thing 

in this regard and all regards including our forecast about the net 

impact of quantitative easing. 

Chairman HUIZENGA. The gentleman’s time has expired. 

I would love to hear how regulation might have hampered that 

excess lending with that equation, but I do need to move on to Mr. 

Schweikert from Arizona, who is recognized for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

You know, it is a complex ecosystem, but let’s stay a little bit on 

this theme. 

And, Mr. Chairman, thank you for tolerating. Sometimes my 

questions get a little off track, but I am trying to sort of understand some things. 

If I was sitting in your lecture halls 10 years ago, and during 

that lecture the discussion was we are going to substantially, dramatically, increase monetary supply, liquidity in the United States 

but all over the world, what would you have put up on the board 

as saying, and this is our prediction of what will happen to productivity gains because of new equipment, new—and why has not— 

33 

what I would have assumed would have been obvious, why hasn’t 

it happened? What has happened—and if we had had this discussion 10 years ago, what did we get right in our predictions and 

what have we gotten wrong, and what is the solution to productivity? Is it purely on the fiscal side and monetary should not 

even—even put it into its calculus? Anyone willing to play on this 

subject? 

Mr. PLOSSER. So let me offer at least one reaction. And that is, 

the first thing to recognize is that monetary policy is not a solution 

to any form of productivity problem. 

Mr. SCHWEIKERT. Okay. And you actually beat me to my punch 

line, but I was going to wait to the 5-minute mark for that. 

Mr. PLOSSER. I am sorry. 

Chairman HUIZENGA. Can you pull your mike a little closer? 

Mr. PLOSSER. Yes. And I think it is a mistake for the public or 

Congress or anyone else to believe that putting that in the hands 

of central bank is the right thing to do. 

Now, economists really don’t understand a whole lot about the 

evolution of productivity. It is not something that we know much 

about. We don’t predict it very well. We know some of its determinants, but at the end of the day, the long run health of the economy, and our ability to gradually continually increase our standards of living, is all about productivity. But nothing else really matters very much at the end of the day. 

Mr. SCHWEIKERT. And, look, this one should be nonpartisan, but 

there is something wrong in the formulas we all went to school 

under. If I put this much money into education; if I put this much 

money into tools and equipment; if I put this much money in lending capital for business, plants and equipment, you will get this 

type of productivity gain. And now we are living in a world for several years now where lots of liquidity, lots of money has actually 

gone into those, and I am not seeing it. So what did we get wrong? 

Mr. PLOSSER. Putting money through a central bank doesn’t 

solve the problem. The productivity is generated by how that 

money gets used at the end of the day. 

Mr. SCHWEIKERT. Okay. So is the formula and the amount of liquidity that central bank expansionary policy that cash ended up 

on money center banks’ books buying— 

Mr. PLOSSER. So this— 

Mr. SCHWEIKERT. I am sorry. 

Mr. PLOSSER. I am sorry. So this goes back to the previous question about why we haven’t had inflation. I think what many economists, myself included, were wrong about, in part, had to do with 

a lot of the money—I will call it money, but that is not really what 

it is. A lot of the reserves that were created through quantitative 

easing are still in the banking system. 

Dr. Levy said they haven’t been spread out in the economy, 

which is actually turn them into money and then turn them into 

inflation. 

Mr. SCHWEIKERT. So if I were even to look at banking sectors and 

a couple of other sectors and take a look at what we would all 

around here refer to as sort of this tier one, or Boswell compliant 

capital, a lot of that you might have, if you could do the formula 

backwards, may have come from the quantitative easing? 

34 

Mr. PLOSSER. Right. So I think quantity easing and low interest 

rates did two things that were not terribly helpful. One is they led 

to what I would describe as a lot of financial re-engineering, companies buying back debt, or buying back stocks, or taking a form 

of leverage. It didn’t get used in the usual form of lending and productive capacity. 

Mr. SCHWEIKERT. Solicitation of the entire panel. So if I came to 

you and said, all right, productivity gain is important for my 

friends on the left, for particularly those on the right, whether we 

are going to be able to afford our social contracts, all the other bells 

and whistles that society wants, but it is going to come from fiscal 

policy or from types of fiscal policy where we create barriers for 

growth and we need to stop doing it, more rational, everything 

from taxes, from regulatory system, and the interplay between 

those, and we have to stop thinking somehow the Federal Reserve 

is going to bail out our failure to act, am I speaking heresy, or do 

we sort of from all sides, do we agree that it is fair? 

Mr. TAYLOR. So we teach, I think all of us, the productivity 

growth comes from investment and from technology. You know, as 

a famous formula tells us that. 

And right now, if you look at our low productivity growth, it is, 

you know, less than half a percent for the last 5 years. We also see 

very low capital accumulation, and we also see very low so-called 

total factor productivity. So those are the reasons. And how do you 

get more private investment? I think it is just regulatory reform. 

It is the tax reform. 

Mr. SCHWEIKERT. Okay. If the chairman would allow me, I want 

to hear— 

Chairman HUIZENGA. Very quickly. 

Mr. LEVY. So as I pointed out, the Fed has very successfully lowered bond yields and the real cost to capital. Why hasn’t that stimulated more capital spending that has been the weak link in the 

economic expansion and productivity? Why haven’t businesses responded to the lower cost to capital? And survey suggests businesses’ biggest concerns is taxes, regulation, and the like. 

And once again, I think it gets to the point where we need to address those concerns with the right policy tools rather than more 

monetary ease, which the Fed’s model tells us it should do. 

Mr. SCHWEIKERT. Mr. Chairman, thank you for your patience. I 

guess the theme I was working on in many ways we can build a 

model that demonstrates that there is a massive, massive 

misallocation of capital, and it was arrogant of us to somehow 

think it was going to go where we all wanted it to go, and that at 

some point those of us who do fiscal policy need to do the hard 

things. 

We need to do the tax reform. We need to do the regulatory reform. And some of us, I think—I believe technology, whether it be 

the super computer we carry in our pocket, we could have a revolution on how we regulate in a more dramatically effective, less expensive, rational model, and I am terrified I don’t hear enough discussion about it. 

So with that, I yield back. 

Chairman HUIZENGA. The gentleman’s time has expired. 

35 

With that, the Chair will recognize Mrs. Love, of Utah, for 5 minutes. 

Mrs. LOVE. Thank you. What I failed to mention in my Tylenol 

analogy is that, you know, when you give your child way too much, 

you end up hurting parts of the body that had nothing to do with 

the fever to begin with. 

So I would actually say, in other words, that when the Federal 

Reserve ventures out of monetary policy, and they expand into regulatory policies and practices, they actually hurt parts of the financial world that had nothing to do with financial crisis, which is 

some of the examples that we have seen. 

I actually wanted to go and expand upon what I was talking 

about earlier in the Federal ReserveAct and the amended Humphrey-Hawkins to include full employment. 

What, in your opinion, have we gained from that amendment? 

I haven’t spoken to—I haven’t asked your opinion, Dr. Plosser, 

if you wouldn’t mind. 

Mr. PLOSSER. I am not sure we have gained a whole lot. I think 

there is no other central bank in the world that has a mandate like 

that. Many of them have inflation targeting mandates. Many of 

them have article mandates where it puts inflation first then says, 

well, if inflation is okay, you can sort of do some other things that 

help the economy. I think what we have done, unfortunately, is 

opened the door for asking the Fed or expecting the Fed to do all 

sorts of things that it is not particularly suitable to do. 

And my comments, remarks, I made—and they seem to sort of 

want to take responsibility for everything from real wage growth 

to participation rates, to how many part-time workers we have, all 

sorts of things that monetary policy just really can’t do. And so the 

whole thrust of my argument is that by narrowing the things we 

asked them to do, the easier it is to hold them accountable for 

whether they are successful or not. 

Mrs. LOVE. And I would think— 

Mr. PLOSSER. —it has to be you don’t ask them to do the things 

they can’t do. 

Mrs. LOVE. Yes. And it would also be easier for us not to have 

look at every aspect and manage the thing that they do also. 

Do you have a comment with that, Dr. Johnson? 

Mr. JOHNSON. Congresswoman— 

Mrs. LOVE. In terms of what we have gained. In your opinion 

what we have gained from that. 

Mr. JOHNSON. Sure. Sure. Look, I think the legitimacy of our 

government institutions is really important, for whom does the Fed 

work and how do you communicate that? I think we mustn’t lose 

track of that. It has taken a beating probably through their own, 

I think, inattention to financial regulatory issue, precrisis, pre2007, 2008. 

And, you know, I think if you remove the employment mandate, 

it would be misunderstood—that would be—you know, I agree 

other central banks formulate this somewhat differently, but I 

think it would be misunderstood by the American people, and that 

would not be my recommendation. But, you know, that is your 

business. 

36 

You know, what is the problem you were trying to fix? On Monday, I was with Chairman Volcker at an event that was organized 

by the Volcker alliance. And I was reminded by his leadership and 

his ability with his colleagues to bring down inflation. It was a very 

bad problem when he came in. And Chairman Volcker, with others 

of the Federal Reserve, really put the country on the path to what 

was then an impressive economic recovery. And I don’t think it was 

anything in his ability to do that job, which is an incredibly hard 

job with a lot of political pressure. 

I don’t think the Humphrey-Hawkins amendment made it harder 

for him to do that job. So I don’t think—I think the problem is, actually, what you said, you know, what is the nature of a financial 

system, how unstable is it, and what we are going to go about that? 

That is a good question. Should the Fed be on the job for that? Mr. 

Volcker, actually, has some other ideas. You might want to look at 

those. I really recommend the work done by the Volcker alliance. 

That is a really good question, the financial stability part. 

The Humphrey-Hawkins part, I really would not recommend that 

you repeal that. But, you know, again, you are in charge, and if you 

want to do that— 

Mrs. LOVE. I just asked what we gained from it, and I haven’t 

heard any real— 

Mr. JOHNSON. Legitimacy. Legitimacy. 

Mrs. LOVE. —yes, legitimacy on what we have actually gain from 

that. I mean, we can sit there and say, hey, well, I wouldn’t remove 

it for fear that we would something happen. But I haven’t heard 

any example of what we have actually gained from that—from that 

amended to include full employment. 

Anyway, I just have one more—well, I don’t know if I have 

enough time to ask one more question. 

But some of you mentioned that the Fed continued to expand its 

role in systemic regulation and credit allocation. In your opinion, 

Dr. Levy, very quickly, do you think that should make us worry 

about its ability to produce sound monetary policy? 

Mr. LEVY. Yes, in general, because this is just an—by getting 

into credit allocation and expanding its scope, it is just move monetary policy beyond where it becomes capable, and it only generates, 

you know, distortions in economic and financial behavior. 

Mrs. LOVE. Thank you. Great panel today. Thank you. Thank 

you. 

Chairman HUIZENGA. And, certainly—well, last but certainly not 

least, we have Mr. Hill from Arkansas who will be recognized for 

5 minutes. 

Mr. HILL. I thank the chairman. Thanks again to the panel. 

Good discussion about the fact that we have $4 trillion on the Fed’s 

balance sheet up from 8- or 900 billion before the crisis and yet we 

don’t seem to show much for it. As I have said to Chair Yellen before, with deficit spending, with a $4 trillion Fed balance sheet, 

shouldn’t we be in some sort of Keynesian Nirvana of economic, 

which we are obviously not. 

In my view, it is the fundamental issue is that not since the 

1930s have we seen a money multiplier rate at 4, at this low, low 

level, and I think it speaks to—I mean Eccles in the 1930s called 

37 

it ‘‘pushing on a string,’’ and everybody understands that, but it 

hasn’t been lower since say 1935 than it is today, period, full stop. 

And so, Dr. Levy, I loved your testimony, and it seems to me that 

the reason is nonmonetary policy structural impediments, which 

we never get an answer to when the administration come and testifies. Secretary Lu, zero; Chair Yellen, zero on this topic. They will 

not admit explicitly that there are major nonmonetary policy structural impediments such as the fact that operational and credit risk 

has been completely mangled by Dodd-Frank, that there is just 

plain fear on the part of market participants, whether they are 

small business people trying to comply with Department of Labor 

new rules or implementing the Affordable Care Act or maintaining 

limits on their employee to comply with avoiding the Affordable 

Care Act, that their staff, in my judgment, is misdirected from productive functions to compliance oriented functions. 

And finally, that Dodd-Frank, I think, has made all the institutions sort of aligned in a pro-cyclical sort of way instead of allowing 

diversity in risk parameters among the activities of our banking institution. So what, in your view, and be specific, would get our multiplier up? 

It took 30 years or more for the multiplier to rebound from the 

1930 depression, a long time, but it fell off a cliff from 8 or 9 in 

2007, straight to the bottom. It has never moved since we started 

all this stimulus. 

So Dr. Johnson, what, in your view, what is the single biggest 

thing we can do in the government to stimulate a faster expansion 

of the multiplier? 

Mr. JOHNSON. Great question, Mr. Hill, and you know, and I 

don’t disagree with the formulation, although it is not exactly the 

standard economic version. I think we focus on the productivity 

growth and the money multiplier, the monetary policy will adapt 

to be consistent with that. Look, I am a skeptic with regard to the 

regulatory impediments, but you know— 

Mr. HILL. Why? Why? Give me one reason why. 

Mr. JOHNSON. Because I spent a long time studying that question, that issue, and those measures around the world, and I don’t 

see that— 

Mr. HILL. So you believe that banks are lending more and have 

higher productivity, and credit is getting to consumer and businesses better today— 

Mr. JOHNSON. No, sir. 

Mr. HILL. —than it was in 2005? 

Mr. JOHNSON. No, sir. Can I finish answering the question? 

Mr. HILL. Of course. 

Mr. JOHNSON. No. Look, we had a huge financial crisis, Mr. Hill, 

and I think if we are looking at medium term, longer term growth, 

the most important thing is avoid having another crisis like that, 

right. So that was the goal of Dodd-Frank, you don’t like it, I understand that, you are going to repeal and replace it, I understand 

that. Let’s see what happens. I am very worried. I am very worried 

about that. But on the regulatory pieces, it is going to be fascinating. I am just watching this from the side, and I—you know, 

I wish you well because I want good things for the American economy, but I think the story that you have, that narrative that you 

38 

are going to remove those regulatory impediments and very good 

things will happen because the impediments were the problem, I 

am skeptical. I am not disagreeing with— 

Mr. HILL. Okay. I will put you down as— 

Mr. JOHNSON. Sorry. 

Mr. HILL. Excuse me, it is my time. I will put you down as a 

doubter on regulatory. How about tax reform? 

Mr. JOHNSON. I have testified to this Congress a number of occasions in favor of various forms of tax reform, and I think if you can 

find ways to simplify the corporate tax code, remove a lot of the 

special treatments and so on, that could be extremely helpful. I am 

in favor of lowering taxes, absolutely, on the lowest paid Americans. I don’t see why anybody earning under $50,000 a years pays 

any tax, and I am including Social Security contribution. 

So yes, I am all in favor of that, but be careful with those projections, the dynamic scoring that says it won’t impact the budget deficit, because it will, and I think you want to be cognizant of the 

impact on the budget deficit, which I know you talk about a lot, 

and so please really take that seriously because otherwise the debt 

numbers the next time we come back here are going to be a lot 

higher. 

Mr. HILL. Ten seconds, somebody else want to tackle that? Dr. 

Levy. 

Mr. LEVY. Yes. Okay. I think if you were to get rid of a lot of 

the micro-regulations in Dodd-Frank, banks are sitting on trillions 

in excess reserves that would increase banks’ willingness to lend, 

and you would see the biggest increases among small- and medium-sized banks and a lot of their lending is to medium- and 

small-sized businesses that generate a lot of jobs. 

Okay. But that is on the financial side. On the nonfinancial side, 

tax reform, and I emphasize reform and not just increase deficit 

spending, corporate tax reform that lifts the gray cloud off of corporations, simplification, individual income tax cuts, but don’t go 

overboard, and the third point is normalize interest rates. You 

raise interest rates that reduces the demand for money that increases velocity, so what you—what I am really talking about here 

is resetting monetary policy but also resetting fiscal and regulatory 

policies in a way that I think what has happened over the last, I 

don’t know how many years, these inhibitions to growth have constrained both aggregate supply and aggregate demand. 

Let’s reduce those inhibitions through wise policies, both within 

the financial system so that banks are putting to work the excess 

reserves and on the nonfinancial system so that businesses—and 

once again, if you look at economic performance so far this expansion, consumption has grown at a fine pace, so has housing. The 

weakness is capital spending, as Dr. Taylor said, the capital stock 

net of depreciation has been declining, this means not just lower 

capital ratios relative to labor but there is less training of labor of 

new capital. You really need this kind of regime change, and then 

you are going to get the multipliers moving back up. 

Maybe the reason why monetary policy has worked is because it 

hasn’t worked. I would love to see the regime changes that really 

force monetary policy to normalize. 

39 

Chairman HUIZENGA. I think therein lies our—we have done one 

thing here. We have successfully bent time; therefore, the last 10 

seconds. So I do deeply appreciate the time invested by our panel 

and by our members on this very important issue, and I would look 

forward to continuing the conversation. 

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. 

And with that, the hearing is adjourned. 

[Whereupon, at 12:13 p.m., the hearing was adjourned.] 

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