U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

64–550 PDF 2011

PROMOTING ECONOMIC RECOVERY AND 

JOB CREATION: THE ROAD FORWARD 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JANUARY 26, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–1 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO R. CANSECO, Texas 

STEVE STIVERS, Ohio 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

January 26, 2011 .............................................................................................. 1 

Appendix: 

January 26, 2011 .............................................................................................. 61 

WITNESSES 

WEDNESDAY, JANUARY 26, 2011 

Brody, Kenneth D., Partner, Taconic Capital ....................................................... 54 

Bursky, Andrew M., Chairman, Atlas Holdings, LLC .......................................... 52 

Hoffman, Eric, Executive Vice President and Chief Operations Officer, Hoffman Media, LLC .................................................................................................. 48 

Kohn, Dr. Donald, Senior Fellow, The Brookings Institution .............................. 12 

Maddy, H. Charles III, President and Chief Executive Officer, Summit Financial Group ............................................................................................................. 50 

Poole, Dr. William, Senior Fellow, Cato Institute, and Distinguished Scholar 

in Residence, Alfred Lerner College of Business and Economics, University 

of Delaware ........................................................................................................... 9 

Scott, Hal S., Nomura Professor of International Financial Systems, Harvard 

Law School ............................................................................................................ 14 

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

University ............................................................................................................. 11 

APPENDIX 

Prepared statements: 

Huizenga, Hon. Bill .......................................................................................... 62 

Brody, Kenneth D. ............................................................................................ 64 

Bursky, Andrew M. .......................................................................................... 65 

Hoffman, Eric .................................................................................................... 72 

Kohn, Dr. Donald .............................................................................................. 76 

Maddy, H. Charles III ...................................................................................... 88 

Poole, Dr. William ............................................................................................ 95 

Scott, Hal S. ...................................................................................................... 98 

Taylor, John B. ................................................................................................. 117 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachus, Hon. Spencer: 

Written statement of Associated Builders and Contractors (ABC) .............. 123 

Written statement of the Manufactured Housing Association for Regulatory Reform (MHARR) ............................................................................... 125 

Written statement of the National Association of Federal Credit Unions 

(NAFCU) ........................................................................................................ 146 

Waters, Hon. Maxine: 

Written statement of the Credit Union National Association (CUNA) ........ 147 

Written statement of the National Low Income Housing Coalition 

(NLIHC) ......................................................................................................... 148 

(1) 

PROMOTING ECONOMIC RECOVERY AND 

JOB CREATION: THE ROAD FORWARD 

Wednesday, January 26, 2011 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

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

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the committee] presiding. 

Members present: Representatives Bachus, Hensarling, Royce, 

Lucas, Paul, Manzullo, Biggert, Miller of California, Capito, Garrett, Neugebauer, McHenry, Campbell, Bachmann, McCotter, 

Pearce, Posey, Fitzpatrick, Luetkemeyer, Huizenga, Duffy, 

Hayworth, Renacci, Hurt, Dold, Schweikert, Grimm, Canseco, Stivers; Waters, Maloney, Velazquez, Watt, Clay, McCarthy of New 

York, Baca, Miller of North Carolina, Scott, Green, Cleaver, Perlmutter, Donnelly, Carson, Himes, and Peters. 

Chairman BACHUS. This hearing of the Financial Services Committee will come to order. Without objection, all members’ opening 

statements will be made a part of the record. 

The gentleman from California, Mr. Royce, is recognized for 1 

minute. 

Mr. ROYCE. Thank you, Mr. Chairman. While the President touted the strength of our economy last night, significant obstacles 

stand between where we are today and real economic growth. The 

housing market continues to sputter, small businesses are burdened with a massive new health care law, and there are real questions about addressing our national debt. Firms are bracing for 

hundreds of new regulations coming from Dodd-Frank. 

Despite what some may say, repairing a fundamentally flawed 

law does not add to the uncertainty in the market. Rather, healthy 

capital markets require sound regulations. Dodd-Frank failed in 

this endeavor. It is now up to us to correct the mistakes of the 

past, truly end ‘‘too-big-to-fail,’’ wind down the GSEs, and ensure 

safety and soundness regulation is the primary focus throughout 

our regulatory structure. 

I yield back, Mr. Chairman. 

Chairman BACHUS. Thank you. Ms. Waters is recognized for 4 

minutes. 

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

Barney Frank, our ranking member, is not here this morning. 

I want to thank you for holding this hearing on ‘‘Promoting Economic Recovery and Job Creation: The Road Forward.’’ While the 

economy has shown some signs of recovery, it is clear that more agVerDate Nov 24 2008 17:28 Mar 22, 2011 Jkt 064550 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 K:\DOCS\64550.TXT TERRIE
2 

gressive action is needed from Congress in order to put our country 

back on the right track. In spite of a slight decrease, unemployment remains unacceptably high. At 9.4 percent, the economy 

shows no sign of regaining the 8.45 million jobs that have been lost 

since 2008, and foreclosures will be 20 percent higher in 2011. 

The Federal Reserve has acted because Congress failed to provide an adequately large stimulus given the magnitude of this crisis. The Fed’s recently implemented qualitative easing policy is 

consistent with the Fed’s dual mandate of fostering maximum unemployment and stabilizing prices. It is clear to me that since interest rates can can’t get much lower, buying long-term securities 

is one of a handful of options left to the Fed to stimulate the economy. 

While reasonable people can have differing opinions about the 

manner in which the Fed has chosen to stimulate the economy, 

ending the Fed’s dual mandate to both reduce unemployment and 

keep inflation low, as some on the other side of the aisle have suggested, is not the answer. 

I think what we must remember and what has been lost on some 

of my colleagues on the other side of the aisle is that this unemployment is a result of the financial crisis of 2008. This crisis, 

which represents the biggest challenge to the Nation’s economy 

since the Great Depression, led to less credit for small businesses, 

prospective home buyers, and other groups who traditionally drive 

local economies. While they played no role in creating this crisis, 

they, like everyone else, are now suffering the consequences of the 

systemic risk caused by the risky behavior of a few reckless institutions, behavior which culminated in a bailout of Wall Street. The 

logical response to this systemic collapse of the financial market 

was for Congress to fill in the regulatory gaps so that this never 

happens again. 

The Dodd-Frank Act reforms the derivatives market, establishes 

a Financial Stability Oversight Council to monitor for systemic 

risk, bans proprietary trading, and makes other fundamental 

changes to a financial industry that we can’t afford to bail out 

again. 

Unfortunately, instead of focusing on solutions to create jobs, today’s hearing seems to be aimed at criticizing the Fed for acting 

in a manner consistent with this dual mandate and criticizing the 

legislation that will prevent another bailout. I am interested in 

working on solutions to create more jobs. However, I believe we 

must protect the reforms in Dodd-Frank because by preventing another bailout we are preventing another financial collapse that will 

result in the loss of millions more jobs. 

Thank you, Mr. Chairman, and I yield back the balance of my 

time. 

Chairman BACHUS. Thank you, Ms. Waters. 

Let me explain to the witnesses and the audience that we are 

having 10 minutes on each side; we have restricted the time for 

opening statements because we want to hear from our witnesses. 

Mrs. Capito and I have both surrendered our time to allow some 

of our other members to make statements. 

At this time, I recognize Mr. Hensarling for 1 minute. 

3 

Mr. HENSARLING. Thank you, Mr. Chairman. Last night in the 

State of the Union Address, the President said, ‘‘To reduce barriers 

to growth in investment, I have ordered a review of government 

regulations. When we find rules that put an unnecessary burden 

on business, we will fix them.’’ 

Mr. Chairman, we found one. It is called Dodd-Frank. Unfortunately, in the President’s announcement he seems to exempt from 

the ambit of regulatory review both Dodd-Frank and ObamaCare, 

which if you talk to any job creators in our Nation is about 90 percent of the challenge that they face. Whether it be fiscal policy, 

monetary policy, or regulatory policy, too many job creators in 

America feel they are either facing uncertainty or they are facing 

hostility. It is one of the reasons that, unfortunately, under this 

President’s Administration, with the exception of 2 or 3 months, 

unemployment has hovered around 10 percent. 

I understand that Dodd-Frank is the law of the land. Not all aspects of it are bad. But we were looking at no fewer than 243 new 

formal rulemakings—and, by the way, there is even uncertainty 

about how many rulemakings. It will be the job of this committee 

to ensure that although the rulemaking is approached deliberatively, it is better to get it right than to do it quick. 

With that, Mr. Chairman, I yield back. 

Chairman BACHUS. Thank you, Mr. Hensarling. 

Mr. Baca is recognized for 2 minutes. 

Mr. BACA. Thank you very much, Mr. Chairman. We all heard 

the President last night state that the future is ours to win—and 

that means that we all need to work together and create jobs. That 

is why I am looking forward to this session, and I hope that my 

colleagues in this committee are committed to working in a bipartisan fashion over the next 2 years, and that is important for us 

if we are to progress and go forward. 

We have a lot of work to do. The American people are still not 

satisfied with the state of our economy. Unemployment is still at 

an unacceptable level, and in my district it is about 14 percent. We 

still are one of the highest in foreclosure. Middle-class families are 

still dealing with the harsh reality of not being able to make their 

mortgage payments. Over the last 2 years, I believe this body and 

the Administration has made some progress, but our work is far 

from being done. 

I hope that we will be able to analyze—and I state analyze—the 

positive actions we took over the last 2 years and see how we can 

build on it. I think that is important for us in this committee, to 

find out how we can build on it. 

With that, Mr. Chairman, I yield back the balance of my time 

and I look forward to this hearing. 

Chairman BACHUS. Thank you. Mr. Paul is recognized for 1 

minute. 

Dr. PAUL. Thank you, Mr. Chairman. I appreciate you holding 

these hearings because the subject of unemployment certainly is 

one issue on which everybody in the Congress agrees. We are worried about it. We need more jobs. Democrats, Republicans, everybody wants to do something with it. But the big problem seems to 

be that everybody has a different answer. Some people want to increase the spending. Others want to decrease the spending. Some 

4 

people want to increase taxes. Other people want to decrease taxes. 

Then it comes to some saying there are not enough regulations and 

some saying there is too much regulation. Some people think we 

can print our way out of it, and that is where the problem comes 

from. 

But I think the problem really is that we fail to ask the right 

questions. Why do we have unemployment? It might have to do 

with the fact that we have a recession. Why do we have a recession? We can’t have recessions unless we understand that there 

has been a boom period and there is a cycle. So it is really dealing 

with the business cycle, why we have boom times, and what we do 

about that. Rather than just dealing with the symptom, I think we 

have to look at the overall cause of why we have these boom periods and then we have the inevitable corrections. And that brings 

us unemployment. 

So by tinkering around the edges and saying that we can change 

taxes or that regulations will solve our problem, I think we will be 

missing the boat. 

I yield back. 

Chairman BACHUS. Thank you. Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. Thank you for holding 

today’s hearing. Nearly 1 year ago in his State of the Union Address, President Obama said jobs must be the number one focus in 

2010. Sadly for businesses, for the last 2 years Washington leaders 

set aside the jobs agenda and instead chose the path of uncertainty. Last night we heard the President again offering a number 

of encouraging words about the need to focus on job creation, but 

I have to say I am skeptical of the rhetoric. 

The President also called for review and reform of Federal rules 

and regulations that stifle job growth. Meanwhile, according to the 

Wall Street Journal last week, ‘‘Business leaders say an explosion 

in new regulations stemming from the President’s health care and 

financial regulatory overhaul has, along with a sluggish economy, 

made them reluctant to spend on expanding and hiring. Companies 

are sitting on nearly $2 trillion in cash and liquid assets, the most 

since World War II.’’ 

Authorized by the Dodd-Frank Act, Federal agencies and bureaucrats are lining up to issue to businesses across the country new 

and costly rules, regulations, and data collecting requests. It is 

fueling uncertainty; it is stifling job growth; and where are the 

jobs? To create jobs, the Administration needs to get serious about 

finalizing trade agreements, reforming the Tax Code, and fostering 

regulatory certainty for business so they can invest, expand, and 

grow. 

I yield back. 

Chairman BACHUS. Thank you. 

Mr. Garrett, for 1 minute. 

Mr. GARRETT. Thank you, Mr. Chairman. The issue of potential 

systemic risk has been something that this committee has been 

looking at now for the last couple of years, and I have said 

throughout that entire time that if you think about it, the most 

critical and obvious systemic risk that faces our economy really is 

our massive national debt that hangs over all of us and our future 

generations as well. So addressing that risk, we can do so by reducVerDate Nov 24 2008 17:28 Mar 22, 2011 Jkt 064550 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\64550.TXT TERRIE
5 

ing the size and scope of the Federal Government is, of course, job 

one, as has been said. One of the primary benefits of doing so, of 

course, will be to help the economy start growing again. 

But beyond that, beyond addressing the budget and spending crisis facing our country, those of us here in this committee have the 

opportunity to remove and review regulations, just as the President 

said, those outdated regulations that stifle job creation and make 

our economy less effective. 

But as Jeb has pointed out, the President tends to exempt some 

new regulations called for under Dodd-Frank as well as those independent agencies. At least one of those agencies, however, is doing 

the right thing, and that is the SEC. Under the leadership of Mary 

Schapiro, she intends to proceed as if they are subject to the President’s order. So I look forward to working with her and with the 

SEC and with other agencies that continue to do what the President has asked for to eliminate those unnecessary regulations of all 

variety to help incent job creation and get our economy back on the 

move. 

Chairman BACHUS. Thank you, Mr. Garrett. 

Mr. Scott, for 2 minutes. 

Mr. SCOTT OF GEORGIA. Thank you, Mr. Chairman. Jobs is certainly the priority of our Nation. There are currently 14.5 million 

Americans out of work. Currently, the national unemployment rate 

stands at 9.4 percent. And in my home State of Georgia, the unemployment rate is a staggering 10.2 percent, with over 500,000 Georgians unemployed. Our country did see a modest gain in economic 

recovery in 2010, but unemployment remained high. An estimated 

7 million Americans, referred to as ‘‘99ers,’’ exhausted all unemployment benefits, and 16.7 percent of workers either could not find 

a job or have simply given up looking for work. 

However, despite these discouraging numbers, our job market is 

showing some signs of improvements. The progress is, in part, due 

to the policies guided by this very Financial Services Committee in 

the last Congress. Economic experts are anticipating faster growth 

in 2011, with more firms expressing positive hiring plans than in 

over a decade. A recent survey from the National Association for 

Business Economics found that 82 percent of the economists expected the Nation’s economy to grow by 2 to 4 percent in 2011. 

These are promising sentiments, and along with my colleagues on 

this committee, I look forward to taking advantage of every single 

opportunity to further increase economic growth in the 112th Congress. 

We must make sure that the United States has the most competitive and innovative workforce and economy in the world. This 

is the only way that the American people will be able to face the 

future with confidence and with boldness the way we need to. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. Mr. Pearce. Mr. McHenry is not 

here. 

Mr. PEARCE. When we are talking about jobs, we ought to take 

just a second to ask, what does it take to create a job? Bill Sweatt 

over in Artesia, New Mexico, said it best: ‘‘It takes me $340,000to 

create a job. I run bulldozers.’’ He said that is what a new bulldozer costs. Any time we tax away his capital, then we take away 

6 

his right to create a job; any time we create regulatory uncertainty 

where he is afraid to invest in that bulldozer, we kill a job. We 

have systematically killed jobs in the timber industry, we have 

killed jobs in the oil and gas industry, we have killed jobs in the 

mining industry, and we wonder why we are at 9.5 employment. 

It is a specious question that we are asking. 

We know what is wrong with the economy. We know where the 

jobs are. We are not willing to take the steps that are there. I do 

not think that we can cut spending enough to create the solutions 

to our economy. We must rebuild our jobs. Let’s put the capital to 

give them certainty and give them tax advantages and they will 

begin to invest again. That is what it will take to create jobs. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you, Mr. Pearce. 

Mr. Watt, for 2 minutes. 

Mr. WATT. Thank you, Mr. Chairman. If I thought this hearing 

was really about jobs and job creation, I wouldn’t be so worried. 

What I am really concerned about is the content of some of these 

witness statements, which really get us into exactly this issue of 

the independence of the Federal Reserve and the appropriateness 

of the Federal Reserve’s dual mandate. 

So I am kind of like President Reagan. Here we go. We have had 

this debate. If we are going to have a Fed, we need to allow it to 

be an independent Fed. If we want to go at whether the Fed should 

exist or not, then we can have that debate in Mr. Paul’s subcommittee. But to do it under the guise of talking about creation 

of jobs, I think, is just disingenuous. 

We are here politicizing the Fed. We are going at their independent status, and that is a debate that we ought to have in a 

clear-cut, unadulterated manner. If you don’t want the Fed, then 

come on and say you don’t want the Fed. But don’t come in and 

try to impact its independence circuitously by going at the mandate 

it has. We gave them that mandate and we gave them the independence to exercise that mandate. And if we want to take it back, 

we ought to do it directly rather than trying to do it by chipping 

away and talking as if we are talking about creating jobs or not 

creating jobs. 

Everybody wants to create jobs. I don’t think this hearing is 

about creating jobs. It is about the independence of the Fed and 

whether we are going to politicize the decisions that they are making. 

I yield back, Mr. Chairman. 

Chairman BACHUS. Thank you, Mr. Watt. 

Mr. Fitzpatrick for 30 seconds. All the other remaining opening 

statements will be for 30 seconds. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

It is entirely fitting and appropriate that at our first hearing we 

discuss job creation and economic recovery, and I appreciate the 

chairman’s leadership on these issues. Americans are hurting, and 

certainly my constituents in the Eighth District of Pennsylvania 

are among them. 

This committee is in a unique position to assist in our country’s 

economic recovery. It can be said that the financial sector was one 

source of the great recession, but with responsible rules and safeVerDate Nov 24 2008 17:28 Mar 22, 2011 Jkt 064550 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\64550.TXT TERRIE
7 

guards and leadership from this committee, our Nation’s markets 

will continue to lead the world and be a source of American prosperity. We all look forward to getting to work and listening to today’s testimony. 

Thank you, Mr. Chairman. I yield back. 

Chairman BACHUS. Thank you. 

Mr. Huizenga. 

Mr. HUIZENGA. In the interest of time, I have a longer statement 

for the record that I would like to submit, if that is all right with 

you. But I want to thank the chairman. 

Chairman BACHUS. This won’t take away from his time, but anyone who has an opening statement can submit it for the record. We 

have already had an unanimous consent for that. 

So we will start the time again. 

Thank you. 

Mr. HUIZENGA. Thank you, Mr. Chairman. I appreciate the opportunity, and Ranking Member Frank, for holding this important 

hearing today. I am a small business owner from Michigan involved in real estate and construction trades, and I can tell you 

that Michigan has been hit like no other State. I see some heads 

nodding already. 

In recent years, the unemployment rate has been well above the 

national average. There are areas in my district in the Second District in Michigan that I represent which actually have seen the official unemployment rate double the national average, and that is 

not including the hundreds of thousands in Michigan who have 

stopped looking. We need to turn this around. 

Last evening, we heard the President declare that the actions of 

this Administration and Congress had ‘‘broken the back of this recession.’’ I am not convinced that we are out of the woods. I can 

tell you the people on the ground back in Michigan don’t believe 

that. And that is my main concern. 

There are some small business principles that I live by and run 

my businesses by. One, don’t spend more than you take in. I think, 

clearly, we are violating that. Two, do what is necessary to create 

an atmosphere for success. I am concerned that while well-meaning—as well-meaning as our current law is here under DoddFrank, we don’t achieve that goal through that. 

Chairman BACHUS. I thank the gentleman from Michigan. 

Mr. HUIZENGA. Thank you, sir. 

Chairman BACHUS. Mr. Dold. 

Mr. DOLD. Thank you, Mr. Chairman. 

I certainly want to take this opportunity to thank the witnesses 

for joining us today, and we look forward to your insight. What we 

are talking about today is jobs and the economy, how do we improve those things. We must improve the climate for business. I am 

a small business owner. I am a job creator. And one thing that I 

can tell you is that back in my district, the unemployment rate in 

certain areas is well above 20 percent. 

We need to create an environment that allows businesses—small 

businesses, medium-sized businesses, and large businesses—to invest back in their businesses. Right now, they are unwilling to do 

so because there is no certainty. We need to create more of a certainty in terms of the environment and cut down on the onerous 

8 

regulations to make them more competitive and even the playing 

field in a global marketplace. 

So I look forward to your comments today, and I yield back. 

Chairman BACHUS. I thank the gentleman from Illinois. 

At this time, Mr. Schweikert, the gentleman from Arizona. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. I truly appreciate 

you putting together this hearing. Being from Arizona, we are basically foreclosure central. The devastation that I have seen in my 

real estate market; the number of families who have been just 

crushed by home prices, but also banking, Fannie Mae, Freddie 

Mac, policy. And, Mr. Chairman, I truly hope you have some real 

talent on this panel. If there is a moment where I can also reach 

out to each of you because I have some very technical and very specific questions I need some data on. I would really appreciate that 

opportunity. 

So, thank you, Mr. Chairman. 

Chairman BACHUS. I thank the gentleman from Arizona. 

At this time, the gentleman from New York, Mr. Grimm. 

Mr. GRIMM. Thank you, Mr. Chairman. I would like to thank you 

for calling this hearing on job creation. We all know it is a top concern for America, and in just about every kitchen table in Staten 

Island and Brooklyn, that is the number one discussion. 

What I would like to hear today is a discussion on how this recent legislation is creating uncertainty for small businesses. Specifically, I would like to discuss how Dodd-Frank regulatory reform 

may affect the flow of credit to small businesses that are looking 

to expand, create jobs, but they are finding that their ability to do 

so and their access to funds in a cost-effective way have been restricted. 

With that, I yield back. 

Chairman BACHUS. I thank the gentleman from New York. 

Our final opening statement will be from Mr. Stivers, the gentleman from Ohio. 

Mr. STIVERS. Thank you, Mr. Chairman. I appreciate you calling 

this hearing. Obviously, jobs is the number one issue. In Ohio, 

where I am from, we have over 10 percent unemployment in some 

parts. Obviously, jobs is the number one issue in Ohio, and we 

have small business and business people sitting on capital unwilling to invest in their businesses to create jobs. 

And so I would like to hear today from the panel a little information about the unintended consequences of our current regulatory 

scheme, including Dodd-Frank, and how it is adding to the uncertainty and keeping business from having access to capital. 

Thank you, Mr. Chairman. I look forward to hearing that. 

I yield back. 

Chairman BACHUS. Thank you. I thank the gentleman. 

At this time, I would like to introduce our very distinguished 

first panel for today’s hearing, which is entitled, ‘‘Promoting Economic Recovery and Job Creation: The Road Forward’’: Dr. William 

Poole, Distinguished Scholar in Residence, Alfred Lerner College of 

Business and Economics at the University of Delaware; Professor 

John B. Taylor, the Mary and Robert Raymond Professor of Economics at Stanford University; Dr. Donald Kohn, Senior Fellow at 

9 

the Brookings Institution; and Professor Hal S. Scott, Nomura Professor of International Financial Systems at Harvard Law School. 

We welcome your testimony, gentlemen. We will start with Dr. 

Poole. 

STATEMENT OF DR. WILLIAM POOLE, SENIOR FELLOW, CATO 

INSTITUTE, AND DISTINGUISHED SCHOLAR IN RESIDENCE, 

ALFRED LERNER COLLEGE OF BUSINESS AND ECONOMICS, 

UNIVERSITY OF DELAWARE 

Mr. POOLE. Mr. Chairman, and members of the committee, I am 

very pleased to be here today to discuss issues with regard to promoting economic recovery. The topic is obviously an enormous one. 

But what aspect of Federal policy deserves to be at the very top 

of the list of concerns? The Federal deficit is my answer. However 

well the economy may perform this year, growth over an extended 

period will require that the Federal budget be put in order. There 

must be no higher priority. 

Before I get to budget issues, a few brief comments on regulation. 

There are scores of disquieting anecdotes circulating about the depressing effects of regulation. One that I heard recently from a 

friend concerned a company that had for many years hired summer 

interns. Not this past summer, however. Following an examination 

of the effects of the Affordable Care Act and increasing insurance 

costs and risks, the company decided to forego its usual summer 

intern program. I find the anecdotes persuasive, but whether regulation adds up to a significant impediment to growth is yet to be 

determined. 

Now let me go to the very most serious issue, the budget. 

Chairman BACHUS. Excuse me, Professor. 

Let’s give respect to the witnesses. I know some of you all are 

sort of talking and reacting, but let’s try to have respect and preserve our decorum. 

Thank you. 

Mr. POOLE. The general public does not understand the enormity 

of the budget challenge. The Congressional Budget Office has said 

clearly that the current budget is not sustainable. It is natural, and 

often appropriate, to view the task of repairing a budget problem 

as involving some combination of tax increases and spending cuts. 

It would be useful if Congress would ask the CBO to clarify this 

issue by projecting the tax rates that would be necessary to finance 

spending in current policy projected over the next 30 years. What 

will be immediately apparent, I believe, is that there are no rates— 

no tax rates—consistent with the functioning of a market economy 

that could finance the projected spending. If tax increases cannot 

fix the budget problem, Congress will have to cut outlays. Above 

all, Congress will have to scale back entitlement spending. That 

means Social Security, Medicare, and Medicaid. And I will be 

blunt: We cannot save Medicare in its current form. 

I emphasize that the issue is spending in current policy, not 

spending in current law. As the CBO states in its important study, 

long-term budget outlook, released this past August, the Administration and Congress have systematically set current law to understate likely outlays and overstate likely revenues. This is a problem 

with the current Administration and prior ones and is how the NaVerDate Nov 24 2008 17:28 Mar 22, 2011 Jkt 064550 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\64550.TXT TERRIE
10 

tion, for example, ended up with the Bush Administration tax cuts 

that expired at the end of 2010. 

And here I will be blunt again: Current law budget projections 

for future years have become so distorted that they are hardly 

worth looking at. The problem of inaccurate and distorted budget 

projections is especially acute with regard to Medicare. The chief 

actuary said this in the appendix to the Medicare Trustees Report 

released this past August. And this will be a quote from the appendix: ‘‘The financial projections shown in this report for Medicare do 

not represent a reasonable expectation for actual program operations in either the short range as a result of unsustainable reductions in physician payment rates, or the long range, because of the 

strong likelihood that the statutory reductions and price updates 

for most categories of Medicare provider services will not be viable.’’ 

Everyone agrees that tough decisions are needed but many say 

not yet, because of the importance of nurturing the recovery. I 

doubt that Federal spending is as important to recovery as many 

believe. But suppose I accept that argument—the argument that 

Congress should go slow in cutting spending. Many things could 

and should be done now that would have a minor effect on current 

spending, but a major long-run effect. 

The President’s Deficit Commission contains many useful recommendations. Modifying Social Security to place the program on 

a sound basis need not involve any changes to current benefits or 

taxes. Following the Commission’s recommendations would demonstrate that the Federal Government can get serious about fixing 

the budget problem. 

There are scores of outlays and tax expenditures that ought to 

be phased out. Along with many others, and probably a clear majority of citizens, unfortunately, I have low expectations. People are 

losing confidence in the Federal Government. Something must be 

done to resolve the situation with Fannie Mae and Freddie Mac. 

They should not be permitted to remain alive on government life 

support. If Congress sets Fannie and Freddie on a shrinking path, 

I am confident that private firms could pick up the slack quickly. 

For those who are less optimistic, a cautious plan is feasible but 

would do the job. The two companies should stop their purchase of 

new mortgages and permit their existing mortgage portfolios to run 

off as homeowners pay down mortgages in the normal course of 

business. The companies should announce a gradual increase in 

securitization fees, which would create room for private firms to 

enter the business over time. How can Congress permit these two 

firms to survive? After all, with their proven record of failure, costing taxpayers $150 billion and counting, they are not shining success stories. 

I began my study of economics using the justly renowned textbook by Paul Samuelson. Early in the text is a subheading: ‘‘The 

Law of Scarcity.’’ Samuelson points out that, ‘‘In the world as it is, 

even children learn in growing up that ‘both’ is not an admissible 

answer to a choice of which one.’’ When will American voters and 

Congress learn that ‘‘both’’ is not an admissible answer when it 

comes to Federal spending? 

Thank you, Mr. Chairman. 

11 

[The prepared statement of Dr. Poole can be found on page 95 

of the appendix.] 

Chairman BACHUS. Thank you, Dr. Poole. 

Professor Taylor. 

STATEMENT OF PROFESSOR JOHN B. TAYLOR, MARY AND 

ROBERT RAYMOND PROFESSOR OF ECONOMICS, STANFORD 

UNIVERSITY 

Mr. TAYLOR. Thank you, Mr. Chairman, and other members of 

the committee. Thank you for inviting me to testify at this important time. 

It has been over 3 years since the crisis flared up and the recession began and we still have unemployment well over 9 percent. It 

has been over 9 percent for 20 consecutive months. 

In my view, many discretionary Federal interventions which 

really deviated from basic economic principles were largely responsible for the crisis with the slow growth and indeed for the current 

high rate of unemployment. Many of these interventions occurred 

before the panic in 2008, but they have been doubled down in the 

last couple of years. When you look at each of them, as I have tried 

to do, you find that they had very little effect in stimulating the 

economy or affecting unemployment. 

The one-time payments to individuals did not jump start consumption. The sending of grants to the States did not increase infrastructure spending. The Cash-for-Clunkers program merely 

moved spending a few months up. The purchases of mortgages 

under Quantitative Easing II did not, in my view, have a material 

impact on mortgage rates when other risks are taken into account. 

So, at best, these actions had a small temporary effect, which dissipated quickly with no lasting effect on growth or job creation. 

Indeed, the legacy is higher debt, monetary overhang, and uncertainty about new regulations that have likely been a drag on the 

economy. In my view, none of this should be surprising. Basic economics says this would happen. But we have had this painful experience over the last few years that seems to me point very clearly 

to the need to restore sound fiscal policy, restore sound monetary 

policy, in order to reduce unemployment and create jobs. 

In the fiscal area, I think it is very important to lay out a plan, 

a long-term plan, to reduce spending and stop the exploding debt. 

What I would like to see is a plan put together fast enough that 

this summer the Congressional Budget Office can make a projection, a long-term projection, that brings debt down rather than exploding. On page 3 of my written testimony, I have included a 

chart. It has the projections of CBO of the debt to GDP ratio, the 

forecast they made last summer, the forecast they made the summer before that. A plan should be scored to reverse this disturbing 

explosion of the debt as soon as possible, and I believe the uncertainty that would generate would directly affect jobs. 

Some say we should wait, postpone the reductions in spending 

that are required. I don’t see the evidence for that. In fact, what 

I see—and I have included a chart in my testimony on this as well 

on page 4—what I see is the importance of private investment in 

creating jobs. It is just an amazing correlation between this high 

unemployment rate and the low level of private investment we 

12 

have. There is no such correlation with respect to government purchases or spending. We really need to take that into account and 

address the real problem. 

But just as Congress and the President needs to lay out a plan 

for reducing the debt, I think the Federal Reserve should lay out 

a plan for reducing the size of its extraordinarily large balance 

sheet. In addition, I think in order to generate more predictable, 

certain policy, bolster the Fed’s independence in the monetary policy area, we should amend section 2 of the Federal Reserve Act; 

amend it in a way that clarifies the objectives of the Fed and restores reporting requirements which were removed in 2000. 

It would be better, in my view, for economic growth and job creation if the Fed focused on the goal of long-run price stability within a clear framework of economic stability. Such a reform would not 

prevent the Fed from providing liquidity, serving as lender of last 

resort, or cutting interest rates in a financial crisis or a recession. 

In addition, it seems to me the reporting requirements could be 

amended. The Federal Reserve Act, I think, should require the Fed 

to report its strategy that it plans to use for setting interest rates 

in order to achieve this goal of price stability. The Fed, of course, 

should establish its own strategy. It shouldn’t be dictated by the 

Congress. And the Fed should have the discretion to deviate from 

the strategy in a crisis or other unanticipated circumstances. However, if it does deviate, it should and must report in writing and 

in a public hearing the reasons for such deviations. 

This requirement provides a degree of accountability that I think 

is needed for an independent agency of government. I think such 

a reform will reverse the short-term focus of policy and help 

achieve strong growth and job creation now and in the years ahead. 

Thank you very much for the opportunity to testify. I am happy 

to answer any questions. 

[The prepared statement of Professor Taylor can be found on 

page 117 of the appendix.] 

Chairman BACHUS. Thank you. 

Dr. Kohn. 

STATEMENT OF DR. DONALD KOHN, SENIOR FELLOW, THE 

BROOKINGS INSTITUTION 

Mr. KOHN. Thank you, Mr. Chairman. Mr. Chairman, members 

of the committee, I appreciate this opportunity to address the topic 

of promoting recovery and job creation. I can think of no more important economic topic facing the Nation today, as many of you 

have remarked. 

A slow economic recovery is a predictable consequence of a financial crisis that impairs lenders and destroys wealth. The headwinds 

seem to be abating and many economists, myself included, expect 

the pace of growth will pick up some this year and the job market 

will improve somewhat. The natural healing powers of a market 

economy are being complemented by very accommodative monetary 

policy and by the boost to spending that will come from the fiscal 

package the Congress and the President agreed to in late 2010. To 

a considerable extent, patience may be the most potent weapon we 

have now to promote economic recovery and job creation. And if the 

economy follows the expected path, that patience should extend to 

13 

withdrawing stimulus in the near term as well as trying to create 

new jobs through major new initiatives. Patience on both sides is 

required. 

That said, I think there are few broad areas in which policymakers can constructively contribute to faster recovery. The challenge for monetary policy will be to promote expansion without allowing fears of deflationary or inflationary spirals to take hold. 

Longer-run inflation expectations must continue to be well-anchored for economic performance to improve. 

The Federal Reserve should continue to emphasize its willingness to adjust its policy based on the changing outlook for growth 

and inflation and its determination to return consumer inflation to 

the range of 2 percent, or a little below, that forms the central 

tendency of the FOMC members’ expectations for inflation over the 

longer run, and then to keep it there. To keep inflation from rising 

above 2 percent, the Federal Reserve will need to exit its extraordinary policies in a timely way. 

In the end, it will not be technical factors that determine whether the Federal Reserve makes progress toward the objectives it has 

been given. Rather, it will be judgment and, critically, a continued 

high degree of independence from short-term political pressures so 

that it can exercise that judgment, and that will be what determines its success. 

In fiscal policy, the lack of a clear and committed path to fiscal 

and debt sustainability is an important source of uncertainty for 

households and businesses and a risk to stability in financial markets. As the recovery gathers momentum, the public and private 

sectors will come increasingly into competition for scarce saving, 

causing interest rates to rise. The pressures on rates will be greatly 

intensified if the investors come to doubt the willingness of the 

Congress and the Administration to confront and make very difficult choices on spending and taxes that are required. You must 

determine and commit to a path to longer-run fiscal sustainability. 

Regulatory policy, including uncertainty about regulations, has 

probably been one of the factors holding back spending, though in 

my view it is probably not one of the main factors. To some extent, 

both greater regulation and uncertainty about that regulation have 

been byproducts of efforts to achieve important societal goals. That 

is certainly the case for financial regulation. In the writing and implementation of Dodd-Frank legislation, the near-term costs of 

greater regulation—and there are costs—are being weighed against 

the promise of a more stable and resilient financial system that 

will be able to avoid the types of systemic problems that have proven so disruptive and costly for jobs and incomes over the past several years. Its net effect will depend importantly on how it is implemented. 

I believe that, on balance, the new legislation will make our financial system stronger and more resilient to unexpected developments, will reduce the moral hazard effects of ‘‘too-big-to-fail,’’ and 

will increase transparency for better monitoring by both supervisors and the private sector. I hope that implementation of the 

legislation is not materially slowed. In many cases, putting in place 

some rules, even if they are adjusted later, will do more to relieve 

14 

uncertainty and allow the private sector to adapt and move forward 

than would a generalized slowing of most implementation. 

Of course, the Congress must continue to evaluate whether the 

benefits of specific requirements of the law, and the law’s implementation more generally, are likely to exceed their costs. As our 

economy recovers from this painful episode, it must be reoriented 

from excessive dependence on debt, and especially from dependence 

on foreign saving and capital inflows to finance spending in excess 

of production. 

Fiscal and regulatory policies must be structured to reduce government borrowing over time and to encourage private saving and 

business capital spending. Monetary policy must contribute to a 

macroeconomic environment characterized by stable prices and 

moderate fluctuations in economic activity to facilitate longer term 

planning by governments, households, and businesses. None of this 

will come easily or quickly, but it is essential to promoting longer 

term economic growth and job creation. 

Thank you, Mr. Chairman. 

[The prepared statement of Dr. Kohn can be found on page 76 

of the appendix.] 

Chairman BACHUS. Thank you, Dr. Kohn. 

Professor Scott. 

STATEMENT OF PROFESSOR HAL S. SCOTT, NOMURA PROFESSOR OF INTERNATIONAL FINANCIAL SYSTEMS, HARVARD LAW SCHOOL 

Mr. SCOTT. Thank you, Chairman Bachus, and members of the 

committee for permitting me to testify before you today. I want to 

make clear I am testifying in my own capacity and do not purport 

to represent the views of the Committee on Capital Markets Regulation, which I direct, although much of the testimony I am giving 

to you is based on the committee’s reports and statements. 

My testimony today is focused on the implementation of the 

Dodd-Frank Act. The rules that are now being written to implement Dodd-Frank will have a profound impact on our financial system and economy. These rules—the count is questionable—240, 

230—of which are being promulgated by the SEC, the FDIC, the 

CFTC, the Fed, and the Financial Stability Oversight Council, all 

of these rules will substantially revise how we regulate financial 

institutions and markets in this country. 

President Obama, keenly aware of the danger to economic 

growth of poorly formulated rules, is now focusing his attention on 

the general regulatory process and its burden on American competitiveness. But the independent financial regulators are exempt 

from his new initiatives. As a result, they will not be subject to review by the Office of Information and Regulatory Affairs within 

OMB of their cost-benefit analysis, nor required to provide 60-day 

comment periods, as generally applicable in his executive order. Indeed, under current law, only the CFTC has a formal cost-benefit 

requirement. 

Meanwhile, these agencies give on average only 45 days for public comment on the Dodd-Frank rules, down from an average of 

more than 60 days for rules issued in 2005 and 2006, and these 

rules are extremely complicated and being issued at a frenetic 

15 

pace. In revising our regulatory structure, the most important objective should be to get the rules right, not to act quickly. And let 

me be clear. I am not urging delay to avoid or unnecessarily defer 

regulation. I am simply advocating taking the time we need to get 

it right. 

I have four recommendations that may improve this process. 

First, all the financial regulators, including the independent agencies, should be required by Congress to evaluate their rules, the 

costs, and benefits. In addition, OIRA should have the obligation to 

file comments on the adequacy of their analysis. The agencies 

would not be bound by such comments, but they would be given the 

comments—not be bound in order to preserve their independence. 

I should say that the current head of OIRA, Cass Sunstein, a 

former colleague of mine, has argued in various law review articles 

that the independent agencies should be fully subject to OIRA review. My proposal stops short of that. 

Second, Congress should encourage the financial regulators to report on their progress toward meeting statutory deadlines. The 

CFTC has already missed a deadline, and more are likely to follow. 

But this is understandable, and Congress should let these agencies 

know that it will give them more time if such time is truly needed. 

Third, it can typically take days and sometimes weeks for agencies to make available the full text of proposed and even final rules. 

Congress should urge the regulators to make the full text of regulations publicly available as soon as possible so people can comment 

on them and react to them. 

Fourth, it would be unwise, in my view, for Congress to cut the 

budgets of the financial regulatory agencies in an attempt to control or derail the regulatory reforms prompted by Dodd-Frank. 

Tightening the purse strings will not stop the rulemaking process. 

It will only make it worse. Agencies should be given the resources 

they legitimately need to implement this new legislation. If Congress wants to change the legislation, it should do so directly. 

I would like to take this opportunity also to highlight two areas 

where the Dodd-Frank Act could be improved. Others are in my 

written testimony. First, under Dodd-Frank, the newly created Bureau of Consumer Financial Protection is funded from the profits 

of the Federal Reserve. It should be funded like other agencies 

through the ordinary appropriations process. In addition, the Bureau needs a permanent director. Treasury’s temporary powers to 

guide the Bureau will be significantly limited in July when the Bureau becomes a functioning agency. The Congress should call for 

the President to tender such a nomination as soon as possible. 

Second, Dodd-Frank requires Federal agencies to purge credit 

ratings from their regulations. Yet there is no clear solution as to 

how to replace them; for instance, capital requirements are heavily 

dependent now on ratings. In my view, this legislation needs to be 

relaxed. In the short term, the statute should be revised to prohibit 

undue reliance on the ratings, not to ban the use of the ratings entirely. And other options should be explored for the longer term. 

Thank you, and I look forward to your questions. 

[The prepared statement of Professor Scott can be found on page 

98 of the appendix.] 

16 

Chairman BACHUS. Thank you. We have probably about an hour 

before the first votes on the Floor. I am going to forego questioning 

so more of our members can ask questions. 

At this time I recognize the gentleman from Texas, Mr. Hensarling, for 5 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Dr. Poole, in your testimony—not to put words in your mouth— 

I think you had your greatest angst with respect to the spending 

trajectory in the future that creates the deficit and the Federal 

debt that we are contending with now, is that correct? 

Mr. POOLE. Yes. I am pointing particularly to the entitlements, 

the outlays that are on autopilot. 

Mr. HENSARLING. I am not sure if you are aware of this, but less 

than an hour ago you were referencing that the Congressional 

Budget Office should project, I believe, future tax increases necessary to finance the spending trajectory. The CBO just issued its 

current baseline this morning, and they project a $1.48 trillion deficit for Fiscal Year 2011, which will be the single largest deficit in 

American history, following the two previous $1 trillion-plus deficits that occurred under this Administration. That is roughly 10 

percent of GDP, according to the Congressional Budget Office. According to the Congressional Budget Office, debt held by the public 

is estimated over the 10-year budget window to essentially double 

from roughly $8.8 trillion in Fiscal Year 2011 to $18.2 trillion. I 

know that is not comforting to either of us. 

You reference the President’s Fiscal Responsibility Commission. 

I was one of the House appointees to that Commission. You said 

it would be useful to ask CBO to clarify the issues of projecting the 

tax rates necessary to finance spending under current policy. I 

think we both know the answer to that. We had testimony from a 

number of different academics from GAO, I think, including CBO. 

Frankly, to fund current policy, as you know, is going to require 

a doubling of the tax burden on future generations, crushing economic growth as we know it. 

In your testimony you say, ‘‘I want to be blunt: Current law projections versus current policy projections for future years have become so distorted they are hardly worth looking at.’’ 

Can you expound on that view, please? 

Mr. POOLE. Yes. It is a point that is extremely important. Let me 

just give two examples that everybody has heard of and understands. For quite some time, we have had the annual so-called ‘‘doc 

fix.’’ What the doc fix does is to delay the scheduled, in the law, 

reductions in payments to physicians under Medicare. Everybody 

knows that if those scheduled reductions go into force, then many 

doctors will simply drop out. My own ophthalmologist told me this: 

‘‘I’m 62 years old. If those payments go in that schedule, I’m just 

going to retire.’’ 

And so what has happened is year by year by year there has 

been the 1 year at a time doc fix, but the projections forward for 

the outlays include the assumption that the reimbursements will 

decline. 

Mr. HENSARLING. Dr. Poole, another way of saying that is—and 

the Congressional Budget Office scores or estimates essentially 

17 

what Congress says as opposed to what Congress does. Is that a 

fair assessment? 

Mr. POOLE. The CBO has done a fine job in distinguishing between estimates based on current law, which would include things 

like the decline in physician payments. Another good example is— 

- Mr. HENSARLING. I am sorry, Dr. Poole; I have a limited amount 

of time here. I am going to have to move on. 

Dr. Taylor, in your testimony you speak about rules-based monetary policy. I know there was some angst on the other side of the 

aisle that I share about having Members of Congress interfere with 

conducting monetary policy. But when we look at the actions the 

Fed has taken under 13-3, when we look at what is happening to 

the Feds’ balance sheet under QE II, when we look at a Federal 

Reserve setting interchange fees, when we look at a Federal Reserve setting credit card terms, this isn’t exactly your father’s Federal Reserve. 

So what is it—with Chairman Bernanke essentially seeming to 

move us towards inflation targeting, does that seem to be moving 

towards a rules-based monetary policy? Could you expound on your 

views and what you see the Fed doing? 

Mr. TAYLOR. I think the kinds of things you mentioned the Fed 

doing are moving away from what I would call classic traditional 

monetary policy, focusing on inflation and price stability and overall stability, getting involved in fiscal policy issues, getting involved 

in credit allocation. I don’t think you need to have an independent 

agency of government for that. Professor Scott just mentioned the 

idea of the Fed seigniorage paying for the new Consumer Financial 

Protection Bureau. That is an example of this. 

So I think with respect to the Fed, we need an independent Fed 

to conduct monetary policy. And the more that can be more rulelike, more predictable, as it was for many years in the 1980s and 

1990s when we had long expansions and short recessions, the better we will be. The more it becomes erratic, more discretionary, 

more interventionist—you gave many examples—the less desirable 

the policy is and the worse the outcomes. I think we saw that in 

the 1970s, and we are seeing that in last 3 or 4 years as well. 

Mr. HENSARLING. Thank you, my time has expired. 

Chairman BACHUS. For the record, would you clarify what was 

the budget projection, the deficit for this fiscal year? 

Mr. HENSARLING. This is from news reports on my Blackberry, 

so I certainly—members may have a differing opinion, but the Congressional Budget Office estimates a $1.48 trillion deficit for Fiscal 

Year 2011 at roughly 10 percent of GDP. 

Chairman BACHUS. That is approximately $1.5 trillion, but of 

course, the President proposed $10 billion worth of savings in 2014. 

So that would bring it down to $15 or $14.9 billion from $1.5 trillion. He would bring that down a few billion dollars. 

Ms. Waters. 

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

there seems to be some consternation among your colleagues on 

this panel as to whether or not the Federal Reserve’s dual mandate 

makes it difficult to do its job. And we all heard what Mr. Watt 

said when he came in about some of the attacks on the Fed. So I 

18 

ask you, given your background as a former Vice Chair of the Federal Reserve, do you think that the dual mandate presents a conflict for the Fed in carrying out its mission? 

Mr. KOHN. I don’t think the dual mandate has presented such a 

conflict nor does it right now. I think right now we see both inflation running below the long-run objective of 2 percent or a little 

below, and unemployment running well above, as all the members 

have said, well above where it ought to be over the long run. So 

there is no conflict right now. 

I think this is a discussion that the Congress should have. Is 

there a reason to clarify the Federal Reserve Act? I do think the 

last three Chairmen—Volcker, Greenspan, and Bernanke—have all 

said that they recognize that price stability is uniquely the responsibility of the Central Bank, and really the first responsibility of 

the Central Bank. And establishing a stable price environment is 

the way the Federal Reserve, over long periods of time, helps to encourage maximum employment. 

I think it is also the case that not only variations in inflation, 

but also variations in output interfere with the ability of businesses—small and large—to plan, create uncertainty, and are inimical to economic growth. So I do think the Federal Reserve can do 

both. It can seek price stability as it has and it can lean against 

business cycles in a perfectly consistent way. 

I would urge the Congress that if you decide to clarify the objective, that you make sure there are two things: First, considerable 

flexibility in pursuing these objectives over the longer run; and second, that you do nothing to impair the independence of the Federal 

Reserve in carrying out the objectives you give it. 

Ms. WATERS. Thank you very much. I am going to move to Mr. 

Poole. This hearing is not about Fannie and Freddie, but you interjected your thoughts about Fannie and Freddie in your testimony. 

As you know, it emerges as a huge issue in this Congress. And as 

a ranking member of the Capital Markets Subcommitte, it is one 

of those issues that I am going to be very much involved in. While 

I have always supported the mission of Fannie and Freddie, we 

recognize that they failed us. They got into trouble, and we have 

to straighten it out. And one of the things that I want to do is I 

want to work very closely with the opposite side of the aisle and 

take the politics out of dealing with this issue so that we can reform, we do what we have to do to make sure that we don’t have 

to get in the kind of situation we were in before. 

You talked about how easy it is going to be for private firms to 

pick up the slack quickly. What private firms are you talking 

about? Are you talking about Bank of America? Are you talking 

about JPMorgan? Are you talking about Citi? Are you talking 

about Goldman Sachs? Are these the firms that have no problems? 

That didn’t need a bailout? That could pick up the slack quickly? 

Who are you talking about? 

Mr. POOLE. Yes, those it would be among the private firms. 

Ms. WATERS. I can’t hear you. Speak right into your microphone. 

Mr. POOLE. Do you want me to expand at all? 

Ms. WATERS. No, I want you to speak into your microphone so 

I can learn which of the private firms can take up the slack quickly. 

19 

Mr. POOLE. I didn’t say for sure that they would pick up the 

slack quickly. I happen to believe that they would. Other countries, 

high-income countries operate mortgage markets without intermediaries of this kind and they work just fine. There is no evidence 

that those intermediaries are necessary for the mortgage market to 

operate satisfactorily. And if you are worried about how quickly 

private competitors could come in, if you think I am too optimistic, 

then there is a plan. I have outlined it to phase it out slowly and 

allow time for the private competitors to build their business plans 

and to come into the market. 

Ms. WATERS. Did some of the private firms that you are thinking 

about like Bank of America, whom we are working with now dealing with serious problems with robo-signing in this loan modification effort we are trying to do, or JPMorgan or Citi or Goldman 

Sachs, all of whom we bailed out, having the same kinds of problems, or potentially having those problems, do you think these are 

the kinds of firms that can pick up the slack? 

Mr. POOLE. There is no question that those firms have created 

some problems for— 

Ms. WATERS. Just like Fannie and Freddie, wouldn’t you say? 

Mr. POOLE. I would like to emphasize that some years ago, both 

Fannie Mae and Freddie Mac had serious internal problems with 

their accounting systems. They did not file reports as required for 

the New York Stock Exchange, for example, for a couple of years. 

So the issue here is not whether the private firms sometimes make 

mistakes, and indeed, very serious mistakes. It is a question of the 

relative effectiveness of the government firms and the private firms 

and their cost and risk to the taxpayer. 

Chairman BACHUS. Thank you. Mr. Royce. 

Mr. ROYCE. Yes. Mr. Poole, you were president of the Federal Reserve Bank of St. Louis for 10 years. I happen to agree with Dr. 

Paul’s thesis here, and many economists, including the Economist 

Magazine laid out the case that the Federal Reserve, from 2002 to 

2006, had set a negative real interest rate in the United States. 

And as a consequence of that, we were going to create a boom bust 

cycle in housing because we were flooding the housing market with 

credit, and that was a mistake of the Fed. That was one of our errors. 

But the second error, I think, was the government guarantee implied that we had over with Fannie and Freddie, in a situation at 

which Congress intervened in the market in a very big way, in 

1992, with the GSE Act in which we allowed them to go into arbitrage; we allowed them to overleverage 100 to 1; run up a mortgage 

portfolio of $1.7 trillion. A lot of it junk, countrywide. And a lot of 

this was under a mandate from Congress because we were muscling, Congress here was muscling the market. The market wanted 

20 percent down, we got that down to 3 percent and then down to 

0 percent. So what did we think was going to happen? 

Economists at the time—I remember John Taylor here, Professor 

Taylor had a solution to both problems; he wanted the Taylor rule 

first of all applied so that we would have a stable monetary policy, 

we wouldn’t have the boom bust that would come about as a result 

of the flood of credit because we would keep the monetary units 

stable. We wouldn’t have a negative real interest rate. And at the 

20 

same time he and others, Dr. Poole, yourself included, I think, 

warned about some of the consequences with respect to this government guarantee. 

We did not have a higher homeownership rate in the United 

States than other developed nations. What we had instead was a 

higher profit to the shareholders of Fannie and Freddie. Study 

after study showed they were the beneficiary, and management 

was the beneficiary. So you had managed earnings, you had all the 

problems we went through. 

Okay, going forward, what you argued for today was we slowly 

bring the private market back in as we reduce the conforming loan 

limits, as I understand basically your argument there and we 

phase out. 

Now this is the thing I want to ask you: Others are saying well, 

we had that problem with the government guarantee with Fannie 

and Freddie, but now why don’t we bring back a government guarantee. Do you think that brings back the same problems with regard to moral hazard, the same problems with regard to risk pricing that we had with Fannie and Freddie if we bring in a government guarantee? Yes or no, Dr. Poole? 

Mr. POOLE. I would not have government guarantees for mortgages at all. We don’t have government guarantees for auto loans, 

or for all sorts of loans in the marketplace. Why do we need government guarantees for mortgages? It doesn’t make any sense to 

me. 

Mr. ROYCE. I appreciate your response to that question. I am also 

going to just ask—give Professor Taylor a chance for a minute of 

explaining a little bit of foresight in terms of keeping the monetary 

policies stable might help offset the boom bust cycle that we experienced more in the United States than anywhere else in terms of 

the way it hit our real estate. 

Mr. TAYLOR. I think you need to just go back and look at what 

happened in the 1980s and 1990s. We got that inflation down, created price stability, kept to a reasonably predictable rules-based 

approach, and we had two long expansions. And certainly compared 

to what has happened recently, a small recession. So it is clearly 

in the history. I also think it is clearly in the— 

Mr. ROYCE. Let me ask Mr. Scott a question, because this goes 

to the Bureau of Consumer Financial Protection. For the first time, 

safety and soundness regulation takes a back seat to consumer protection. We saw this with the GSEs. We had bifurcated regulation. 

And for those of us who carried the legislation as I did some years 

ago to try to regulate the GSEs for systemic risk, to try to bring 

down that risk, we had the support of the regulatory community. 

What we didn’t have was HUD, right? And we didn’t have Fannie 

and Freddie because they were on the other side of that argument. 

Fannie had the biggest lobby up here, they did not want to be regulated for safety and soundness. They were going to carry out their 

mission because it led to more profits for the shareholders, and especially for management. 

What do we do now to rein in the BCFP and ensure our regulatory structure focuses on solvency regulation so we don’t run back 

into the type of situation we had with bifurcated regulation we had 

before? 

21 

Mr. SCOTT. Do you want me to comment on that? 

Mr. ROYCE. Yes. 

Mr. SCOTT. I think the balance struck between safety and soundness and consumer regulation is a question here because FSOC, as 

you know, can override the new bureau by a two-thirds vote. How 

practical is that? Even if you look at the composition of FSOC, 

there’s not really a true majority of bank regulators on that group 

because it includes the CFTC, the SEC, etc. So I think we need to 

look at that balance. I think it is a question of different voting 

rules. 

Mr. ROYCE. I think you should have to have a sign-off with a 

prudential regulator in advance and that is what my amendment 

was. I yield back, Mr. Chairman. 

Chairman BACHUS. Thank you. What we are going to do—there 

is a vote on the Floor, so we will entertain questions from Ms. 

Velazquez and Dr. Paul, then we well recess for 15 minutes. Can 

the panelists all come back? So we will recess at the end of Dr. 

Paul’s questions. Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. If I may, I would like 

to ask each of the panelists the following question, and I just need 

a yes or no answer. Do you believe that passage of the Dodd-Frank 

Act is responsible for lenders constricting their small business lending? 

Mr. POOLE. I don’t think that is the major reason that small 

business lending is restricted at this time. 

Ms. VELAZQUEZ. Okay. 

Mr. TAYLOR. I think the uncertainty caused by the additional 

regulations is causing people to be more cautious in businesses in 

general to stop doing what they would do. 

Ms. VELAZQUEZ. I am asking because when I was listening to the 

opening remarks made by our colleagues here, they were basically 

saying that small businesses who are the ones creating jobs in this 

country are not—they are limited by access to credit. And that limitation is created by the fact that financial institutions are constricting their lending due to regulations. 

Mr. TAYLOR. I think the uncertainty caused by all the new regulations is making lenders more cautious, absolutely. So I would 

agree with— 

Mr. KOHN. No, I don’t think Dodd-Frank is the major reason for 

the reluctance to make loans to small business. I think the reluctance to make loans to small business preceded Dodd-Frank by 

quite some time and reflected uncertainty in the— 

Ms. VELAZQUEZ. Will you say, if you excuse me, by the collapse 

of the capital markets created by the lack of regulation or lack of 

oversight? 

Mr. KOHN. I am not sure ‘‘created by,’’ but I would say the collapse of the financial systems and the deep recession certainly 

made lenders very much more cautious, as is understandable. 

Ms. VELAZQUEZ. Yes. 

Mr. SCOTT. Congresswoman, I think that actually the Basel capital rules have much more of an impact on lending decisions of 

banks than anything, particularly in Dodd-Frank. I think that Congress should take a look at these rules in more depth. So in a 

22 

sense, Dodd-Frank permits this Basel process to continue, but I 

think Congress should look at it. 

Ms. VELAZQUEZ. And I would like for the record to reflect that 

the last Federal Reserve survey that they conducted with senior 

loan officers this past January showed how small business lending 

is going up. 

Today, in one of the news articles, we have here that the equip- ment listing and finance association said business originated $9 billion in loans, December. They doubled compared to November. So 

they are accessing credit. I don’t think that the role of this committee is to rewrite history because the Federal Reserve survey 

shows otherwise, and lending is going up and small businesses are 

expanding. 

Mr. Kohn, thus far, most of the efforts to splurge up creation, 

particularly among small businesses, have centered around providing credit for established businesses through banks. Should 

more be done to support the growth of new businesses, particularly 

since this is where the greater job creation occurs? 

Mr. KOHN. That was addressed to me? 

Ms. VELAZQUEZ. Mr. Kohn. 

Mr. KOHN. I think the Congress last year passed a law trying to 

encourage banks to make loans to small businesses, I think that 

was a constructive step. I think the regulators, supervisors need to 

continue to make sure that they are not discouraging loans to creditworthy businesses. I don’t know of any new steps that need to be 

taken, but I think the steps that already have been taken need to 

be reinforced and that encouragement given. 

Ms. VELAZQUEZ. Thank you. Thank you, Mr. Chairman. 

Chairman BACHUS. Dr. Paul. 

Dr. PAUL. Thank you, Mr. Chairman. 

I would like to, first, say that I was very pleased with Congressman Royce’s remarks. I do want to follow up with Dr. Poole, especially because you had a lot of emphasis on the debt and the deficit 

that we are running up, and of course, many people have been 

talking about that lately. But I became fascinated with that subject 

as far back as the early 1970s with a significant change in our 

monetary policy, because it was very clear to me and many others 

that this is what it would lead to. It would lead to massive spending, massive deficits, and a massive increase in the size of government and that is where we are. We are at a point of no return and 

no solutions. So I am not a bit surprised that this has happened. 

I don’t like to separate the two, have the deficit problem here 

and the monetary problem over here because I think they are connected, and this is what I want to ask you about. Now if—I know 

this is not on the horizon, it is not likely to happen, I know some 

of the downside arguments from this, but just dealing with the 

question I am going to ask, dealing with the deficit: What if the 

Fed couldn’t buy government debt, what kind of pressure would 

that put on the Congress to act differently? 

Mr. POOLE. Congressman, let me address it in two pieces. It has 

been known since the late 1970s that the demographics were moving in a direction, and starting in 2010, there would be the beginning of the retirement of the Baby Boom generation, and that the 

entitlements, in effect, would become untenable with the very large 

23 

change in the demographic structure of the labor force. That was 

known in the late 1970s, and economists and others have been 

preaching about that without any effect. 

When we talk about a monetary policy adjustment, whatever you 

want to call it, of the type that you have in mind, it is critical to 

know what the alternative is. My teacher and mentor, Milton 

Friedman, always used to say, you can’t enter a horse race without 

a horse. So you may not like the horses that are in the horse race, 

but you have to have a horse to enter that race. 

Dr. PAUL. But Milton Friedman also suggested very strongly that 

he would replace the Fed with a computer, and that is the way he 

would regulate the money supply. But my suggestion here is that 

if the Fed didn’t buy the debt, interest rates would go up, and the 

burden would fall on the Congress because they would have to cut 

back because they were consuming all the savings. Of course now 

today we don’t say, we just create our so-called capital out of thin 

air. 

But another question to follow up on this is, with an individual, 

when they get into trouble, if they have too many credit cards, and 

too much debt, and they get new credit cards and on and on, but 

finally it has to come to an end, and they have to make a decision, 

they declare bankruptcy and liquidate that debt and maybe get a 

chance to start over again, or they might decide, I have to pay my 

debt down, I have to work harder, get an extra job, my wife has 

to work, but cut spending. And they do that, and they can get their 

house in order again and then their standard of living might grow 

again. I don’t know why those rules can’t apply to government as 

well. 

But isn’t it true that in recent decades, we don’t do anything to 

allow liquidation of debt, as a matter of fact, that is the greatest 

sin of all, is to allow the liquidation of debt. And it is the liquidation of debt that allows the growth to come back. So how do we get 

growth if we don’t liquidate debt? All we do is transfer the debt. 

The people who make a lot of money on Wall Street and the Fannie 

Maes and Freddie Macs, and then they get in trouble and we buy 

out this illiquid debt, the worthless debt and put it into the hands 

of the taxpayer, and the problem still exists. 

How in the world can we get growth again if we don’t liquidate 

the debt? Or do you buy into the school that says that is not important, we don’t need to, we can just build debt and debt and keep 

it going forever. How would you rationalize and how would you 

solve this dilemma? 

Mr. POOLE. I tried to be very clear that we will have a crisis 

ahead of us if the Federal budget is not fixed in very significant 

ways, and that the fix has to focus on spending. I thought I was 

very clear about that. We will follow the course of Greece, of Ireland, and of the other countries in Europe, Portugal, that are under 

the greatest pressure right now. We will get there if this problem 

is not fixed. 

We won’t get there quite that way—because the ‘‘solution’’ that 

results will be a rip-roaring inflation. See every inflation in the history of the world has come about because of—great inflation because of fiscal imbalance. 

24 

Dr. PAUL. I agree with that, but I think there is a much closer 

connection. I think the Federal Reserve allows Congress to be irresponsible. And if they didn’t facilitate the debt, the Fed is the great 

facilitator of big government and debt. If they weren’t there to buy 

up this debt, believe me, we would be much more responsible about 

how we manage our affairs. I yield back. 

Chairman BACHUS. I thank you. At this time, the committee is 

going to recess for approximately 15 minutes. We understand the 

second vote may actually be by voice, so we will be back in approximately 15 minutes. 

[recess] 

Chairman BACHUS. This hearing of the Committee on Financial 

Services will come to order. 

At this time, I recognize the gentleman from North Carolina, Mr. 

Watt, for 5 minutes. 

Mr. WATT. Thank you, Mr. Chairman. Perhaps it is an indication 

that you have been around an institution too long when you look 

at the title to a hearing, and you instinctively sense that the hearing is probably going to be about something other than what the 

title is about. And then you look at the testimony and you find that 

it probably is about something other than the title, what the title 

indicates the hearing is going to be about. 

And then you predict in your opening statement that the hearing 

is going to be about something different than what the title indicates that the hearing was going to be about. And then you find 

that your prediction was correct. 

Everybody’s talking about bashing the Fed and the decisions it 

has made in the past. I suspect the second panel will be bashing 

Fannie and Freddie and the decisions that they have made rather 

than about promoting economic recovery and job creation, which we 

have had little discussion about. 

I do want to thank my colleagues on both sides of the aisle for 

at least getting this topic on the table, on top of the table, rather 

than trying to hide it under the subterfuge of promoting job creation. And I want to thank, particularly Dr. Taylor, for putting it 

front and center in his paper. I am looking at the—clarify the objectives of the Fed and it says, in order to achieve a more predictable rules-based policy and bolster the Fed’s independence. 

I guess everybody says we believe in the independence of the 

Fed. Section 2 of the Federal Reserve Act, which lays out the objectives and reporting requirements for the Fed should be amended. 

That is very transparent. And it is quite apparent that he disagrees with Mr. Kohn that price stability and inflation control and 

job creation should be equal pillars of our dual mandate here. One 

should be subordinated to the other, although I am sure he will 

make a case to the contrary. 

I think we have to deal with this. We have to deal with it forthrightly if we don’t think the Fed ought to exist or if we think the 

Fed’s mandate should be changed, we should change it, not have 

scholars come and tell us that they believe that it ought to be 

something else, which is your right to do, Dr. Taylor. You are at 

least forthright about it. You say, I think the Fed’s mandate ought 

to be changed, it ought to be amended. Congress ought to be forthright enough to deal with that, if we believe that. And we ought 

25 

to be forthright enough to know, which I may argue a little bit with 

Dr. Taylor about, that if we don’t do one or the other, you can’t 

have it both independent and be constantly second-guessing and 

first-guessing and making it cater to you all the time. 

So anyway, back to the subject at hand, that is my little prediction; I made the prediction in my opening statement. Unfortunately my prediction came true that this is more about the Fed and 

its policies. 

But the hearing title says promoting economic recovery and job 

creation. Nobody on this panel has really told us what they think 

we should do to create jobs and promote economic recovery. So Mr. 

Poole, if you could direct yourself to that specific thing and then 

go right down the line, I would appreciate it. We got a lot from you 

about how some intern didn’t get hired because of health care reform, which I thought was an insult to us, but you didn’t tell us 

how you how you think we ought to be creating jobs and promoting 

economic recovery which is the subject of this hearing, I thought. 

Mr. POOLE. I am eager to talk about that subject. I want to emphasize that every business decision is based on some sort of calculation as to whether the investments, the costs that you put into 

it can be recovered by the revenue that you get out of the market. 

Mr. WATT. That is economic theory. I want to know what you 

would have us do to create jobs. 

Mr. POOLE. What that means is that the government needs to do 

everything it can to make sure that the conditions under which 

businesses have to make those decisions are as predictable and stable as possible. Now we have extreme examples of—okay. 

Mr. WATT. Dr. Taylor? 

Mr. POOLE. Would you let me finish? 

Mr. WATT. Dr. Taylor, would you give us your estimate of—I just 

want one sentence from each one of you on the subject of the hearing. 

Mr. POOLE. That is the subject. 

Chairman BACHUS. The gentleman’s time has expired, so if you 

will just— 

Mr. WATT. And I was trying to expedite getting a response from 

each one of these gentleman rather than a lecture from Mr. Poole. 

Chairman BACHUS. That was a 41⁄2 minute question. So, the 

question was 41⁄2 minutes long. 

Mr. TAYLOR. I believe my testimony, both written and oral, did 

address the job issue. I think the most important thing to do now, 

based on experience and economics, is to create a stable fiscal policy, a sound fiscal policy which people can rely on, remove all that 

uncertainty about the debt, and the same goes for monetary policy. 

I sincerely believe that is the most constructive thing you can do. 

Thank you. 

Mr. KOHN. In my testimony, I noted that there may not be a lot 

of things we can do; patience may be one of the things that is required here. But I do think policy, on several fronts, can reduce uncertainty, both the monetary policy needs to be—monetary authorities need to be clear what their objectives are for inflation and the 

fiscal authorities need to get their arms around tax and spending 

policy so the people know what to plan for tax rates and government support. The regulatory authorities need to weigh the costs 

26 

and benefits of their regulations carefully. And the last thing I 

would say, that is not in my testimony, is we need to educate our 

workforce so that when the jobs are created, they can take them. 

That is critical. 

Mr. SCOTT. Congressman, I think we need a strong and wellfunctioning financial system to create jobs, because the financial 

system is sort of the life blood of our economy. If loans are not 

made to small businesses, that affects jobs. So we have to be, overall, concerned that we are not doing things that lead the financial 

institutions not to do what they otherwise might do by making 

loans. 

Now that can be as clear as capital requirements which might 

be too onerous so that the banks will not make loans. We have to 

be careful with safety and soundness, but at the same time, we 

should not overdo it. It can be as indirect as derivatives regulation. 

So a very big issue in derivative regulation has been, how are end 

users going to be treated? Are they going to be exempt from a lot 

of these margin requirements in central clearing? That was an 

issue in the consideration of Dodd-Frank. If they aren’t, and they 

are burdened by regulation, they may not be able to hedge as well, 

their business may suffer, and they might hire, therefore, fewer 

people. 

So I think all of these regulations have a way of ultimately affecting jobs. If they are too burdensome on the financial system, 

they will produce less jobs. 

Mr. WATT. Thank you, Mr. Chairman. 

Chairman BACHUS. Let me say this: The question and answers 

were almost 9 minutes. So what we will do at the end of the 5 minutes, is we will let a witness who is answering a question continue 

to answer that question. But if each of you can make your questions a little more concise, I think we will have an opportunity for 

everybody to ask questions. 

Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Professor Scott, in your testimony, you talked about—you gave 

observations on the Volcker Rule and its implementation. And I am 

concerned that Europe, other countries will not adopt the Volcker 

Rule which leaves U.S. financial institutions to go it alone and 

making our financial sector less competitive and forcing, perhaps, 

businesses and jobs to leave the United States for Europe. Could 

the Volcker Rule be implemented so it makes our financial system 

more stable without needlessly making our financial system less 

competitive? 

Mr. SCOTT. I think we need to be very careful how we implement 

the Volcker Rule. I was not one who supported the Volcker Rule 

in the very first place, let me be very clear on it. But if we keep 

it in place, I think we should interpret it narrowly not broadly. And 

I have offered a definition in my testimony as how that can be 

done. 

If we don’t do that, Congresswoman, we are going to be doing 

two bad things, in my view. First of all, we are going to suffer a 

lack of competitiveness because of competitive institutions abroad 

all do this proprietary trading. 

27 

Indeed, if you go back to the Glass-Steagall reform, it was to put 

us on an even competitive balance, in part, that we liberalized 

Glass-Steagall and now here we are going in the other direction, 

but we have done it. All I am saying is, let’s be conservative in how 

we implement it. 

Secondly, actually a very broad Volcker Rule, in my mind, can 

impact the safety and soundness of our institutions. These activities, in some ways, were diversification from typical lending, and 

therefore, over a long period of time made these institutions more 

stable. And this was not the cause of the financial crisis. Goldman 

Sachs profited a lot by its proprietary trading activities during the 

financial crisis. If they had all been making loans, they would have 

been worse off. So I think we should be very conservative in the 

way we implement the Volcker Rule. 

Mrs. BIGGERT. I haven’t been really happy with it either. Do you 

think it would be better not to have it at all or does it provide the 

stability that is needed? 

Mr. SCOTT. Could you repeat that? It is my hearing; it’s not you. 

Mrs. BIGGERT. I just wanted to know, would it be better not to 

have the Volcker Rule at all, or does it provide the stability if it 

is narrowly defined? 

Mr. SCOTT. Yes, I am on record as saying we shouldn’t have a 

Volcker Rule. I testified in the Senate on that. I think we would 

be better off without a Volcker Rule. But having gotten the Volcker 

Rule, I think we should be conservative in how we implement it. 

Mrs. BIGGERT. All right. Thank you. 

Professor Taylor, in your testimony you commented about the 

fact that the unemployment rate is inversely correlated with private investment. Could you comment further on the ways that we 

can help spur the private investment and create jobs? I am also on 

the Housing Subcommittee, so if that relates at all, it would be 

helpful to me. 

Mr. TAYLOR. Sure. It is correct, it is both housing residential investment and business fixed investment. They are both highly correlated. And you can just see in the residential much more clearly 

where the pockets of high unemployment are right where we had 

the biggest boom bust in housing. Nevada is the classic extreme. 

But it is also business fixed investment. 

Here it seems to me the most important thing to do is not raise 

taxes on businesses, period. Try to find ways to reduce them where 

you can, or corporate rates are still very high. I think it is very important to think about these regulatory issues which some of you 

have raised in your opening remarks, both on the financial side, 

but also on the health care side, that really restricts the incentives 

for businesses to start up, whether it is small or big. And these 

start-ups, or these expansions, is what investment is. And so investment grows, and you hire people to build the equipment or construct the structure, and that is the most important thing, in my 

view. 

I think there tends to be too much emphasis on the short-term 

things. Short-term stimulus to investment, and that maybe works 

a little bit, but then it peters out, and then we are stuck in the 

same situation. So I would think more long-term sustainable type 

of things. 

28 

Mrs. BIGGERT. And can you give an example of that that? 

Mr. TAYLOR. Say the short-term incentives for businesses to 

write off for a period of time, they sound good, but then they go 

away and it is reversed. So if you can keep—I think keep the tax 

rates stable and certain so that a business, or you build a structure 

or a new plant the returns are going to be coming out for many 

years, not just 1 year. 

Mrs. BIGGERT. Everything seems to depend on uncertainty; it 

seems like that we have right now, thank you. 

Chairman BACHUS. The gentlelady from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman, and I thank all the 

panelists. We did get some good news today; the Dow crossed 

12,000 for the first time since June 2008. And that shows that we 

have some liquidity going, which is a good sign of recovery. 

During this financial crisis, which was so painful, and it was difficult at times to get Congress to act. And at one point, we did not 

pass the TARP program, which put the banks and the money markets, some of them in my district, into a run on the markets. There 

were some that were calling me screaming, they could see it crashing. And when we finally passed it, they stabilized the markets, 

and I just came from a hearing with Treasury where they are saying that we literally made money on it by all accounts. Specifically, 

a report by a Democratic economist, Blinder, and a Republican, 

Zandi, that is probably the best thing I have read on it where they 

go into great detail on how this program helps salvage the markets. 

My question really is to Mr. Taylor, in your very thoughtful testimony, about the Federal Reserve and going to a rules-based policy. 

Some economists have given the Federal Reserve a great deal of 

credit for being flexible, reacting, taking risks that, in many cases, 

worked out for helping to stabilize the economy. 

So my question, Mr. Taylor, or Dr. Taylor, is would the rulesbased policy that you are proposing rule out the ability for the Fed 

to act as they did in this last crisis with great flexibility and great 

courage and great innovation? 

Mr. TAYLOR. I think what it would have done, in my view, is prevent us from getting into the crisis, if the rules-based policy had 

been followed in advance. So you have to go back and say, if rates 

had not gotten so low, or if the rules on the books of the regulatory 

agencies had been enforced properly, rules-based regulation, then 

I think we could have avoided this crisis. 

With respect to, when the crisis came, and especially in the 

panic, at the time we are talking about with the TARP, I did give 

the Fed substantial credit for establishing the commercial paper, 

funding facility, the money market mutual fund interventions. 

Those seemed to me quite constructive. But the most important 

thing at that point was to reduce the uncertainty caused by the 

TARP. After the TARP was put into action, then you had the crash 

of the markets. That is when the S&P 500 dropped by 30 percent. 

It wasn’t until how that money would be used that the market stabilized. So there are lots of things going on at that point in time, 

but I would say, in my view, no better evidence that rules-based 

policy worked than going back to periods where it was followed and 

29 

seeing how good performance was and looking at other periods 

where it wasn’t and seeing how poor performance was. 

Mrs. MALONEY. And so you are saying going to rules-based policy, if I understand you correctly, it would give us the format, but 

in cases of a crisis such as that to have some flexibility for the commercial paper and other things that they did? 

Mr. TAYLOR. Absolutely. In fact, my proposal to go back to the 

kind of reporting that existed before the year 2000 is just that. 

That reporting was that the Federal Reserve Chairman would come 

and report on the plans for money growth, and if there were deviations, the Chair would be required to say why. It is the same idea. 

I would like to suggest that kind of reporting requirement be reinserted, but it focused more generally on the strategy for the Federal Reserve. And if they decide to deviate from their own strategy, 

then they should be required to come here and tell you why. 

Mrs. MALONEY. Dr. Kohn, would you like to comment in my remaining seconds? 

Mr. KOHN. Yes, Congresswoman, I would. I don’t think that our 

interest rate policy was the main cause of the housing bubble. I 

think that the main cause was a breakdown in supervision in regulation, as well as a breakdown in the private markets ability to supervise and regulate itself. And that is what caused all this financial innovation, the CDOs, etc. that people didn’t understand, the 

huge amount of leveraging, etc. 

We had in the 1980s and 1990s, a number of business cycles and 

a number of asset cycles—think about the S&L problem at the end 

of the 1980s, and the early 1990s that the Congress had to legislate 

taxpayer money to shore up the insurance fund—that happened 

when Professor Taylor says we were following a rules-based policy. 

But it was a failure of supervision and regulation. 

Think about the dot.com boom and bust when we were following 

a rules-based policy according to Professor Taylor. So I think, following John’s formula, that wouldn’t have prevented what happened, maybe made a small difference around the edges. In the 

end, inflation was lower; inflation in 2006, 2007 was 21⁄2 percent. 

It is not that we had such an easy policy that CPI inflation got way 

high. I don’t agree with that. 

I do think that the reporting of the Federal Reserve to the Congress could and should be strengthened. From my years of sitting 

behind this row, right behind Alan Greenspan and consulting with 

Chairman Bernanke, I think the dialogue between the Congress 

and the Federal Reserve is in vast need of improvement. And it is 

from both sdes. You don’t need to pass a law for you folks to ask 

the chairman better questions. 

And I think too often the dialogue between the Congress and the 

Chairman of the Fed gets off on all kinds of directions where—I am 

going to regret some of these things I say, I think, but where Congressmen are trying to enlist his help in endorsing their particular 

ideas. I think the Federal Reserve should be required to say what 

its strategy is, not necessarily on a numerical basis, but how it will 

react to changes in the outlook for inflation and employment, what 

it expects the outlook for inflation and employment to be, and how 

its strategy is consistent with achieving the objectives that Congress has given it. 

30 

And I think you guys need to ask really tough questions of the 

chairman about that. So I think that dialogue definitely needs improving. Whether you need to pass a new law to do that, I am 

open. 

Chairman BACHUS. Thank you. At this time, the gentleman from 

New Jersey. 

Mr. GARRETT. I thank the Chair. Just off the top, the name of 

the hearing that we are having today is, ‘‘Promoting Economic Recovery and Job Creation, the Road Forward.’’ I think what you are 

testifying to is right on the mark to describe basically where we 

are, what regulations are in place and whether it is Fed policy, as 

you were just—Dr. Kohn was just talking about or otherwise. 

These all go to the point of what do we need to do in order to get 

our economy back on track and create jobs. 

Let me go a little afield on the first question here, and I guess 

I will throw it out to Dr. Poole, but anyone else can just chime in 

real quickly on this. There was a piece on CNBC just this weekend 

with regard to Fed accounting, that is why I throw it out to you. 

It said in accounting methodology was just recently reported in 

their weekly report, which is argued that a change in the Central 

Bank to allow the Fed to incur losses, even substantial losses without eroding capital. Any future losses that are made, the Fed may 

have occurred said will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible. That was a comment of Brian 

Smedley, a former New York Fed staffer. 

Are you familiar with the recent change they have on their accounting policy? 

Mr. POOLE. I am not familiar with that, but I would like to emphasize the following very simple point, the Central Bank is not in 

business to make a profit; it is in business to make the economy 

work better. And if the Federal Reserve has to take losses to make 

the economy work better, to help create jobs, then so be it. 

Mr. GARRETT. Right, but don’t you want to have—I understand, 

but don’t you want the transparency there to make sure—the argument goes, right now we saw what is going on in Greece and what 

have you, and the question is can our Federal Reserve basically 

ever go broke? This accounting change basically—I guess, the Fed, 

anybody else can chime in on this, the Fed does their own accounting methodology, we are not setting the accounting rules for the 

Fed, is that correct? 

Mr. KOHN. The Federal Reserve does its own accounting, but it 

is audited by Deloitte & Touche, I think it is D&T these days. 

Mr. GARRETT. But the audit goes against the rules that they establish for themselves, right? 

Mr. KOHN. To a considerable extent, but the Federal Reserve follows GAAP accounting in most respects. I think the point is that 

this will be completely transparent, Congressman. If you want to 

take this account and subtract it from another account, in fact, 

transparency, if anything, will be increased, because that number 

will be right there published on a weekly basis. So it is not about 

transparency. 

To Professor Poole’s point, this isn’t about profitability. The viability of the institution is absolutely unassailable. You, the ConVerDate Nov 24 2008 17:28 Mar 22, 2011 Jkt 064550 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\64550.TXT TERRIE
31 

gress, have given it the seignorage privilege. We—the Federal Reserve—I am still doing that a little bit, I am sorry. The Federal Reserve issues the currency on behalf of the country and realizes the 

returns, and returns $30 or $40 billion a year to the Treasury from 

doing that. And the capital on the books of the Federal Reserve is 

not, in any way, related to the present value of future stream of 

earnings. 

Mr. GARRETT. Anyway, I don’t want to spend a lot of time. But 

this puts it, as I understand it, as a liability to the Treasury as opposed to a liability of the Fed’s balance sheet, which it has been 

up until this point in time. 

Mr. KOHN. This situation hasn’t really arisen in a significant way 

before. But there have been a few occasions where the Federal Reserve delayed sending money to the Treasury in order to replenish 

the capital account. This is a little bit like a deferred tax asset on 

the books of a private corporation, I think. 

Mr. GARRETT. Okay. Professor Scott, you talked about the issue 

of cost benefit analysis that you did there. So have you all—I am 

running out of time already. You have all the Dodd-Frank rules 

where you are not going to have cost benefit analysis. Do you just 

want to elaborate quickly as to the need for those there and acrossthe-board in general, is that a good thing or a bad thing, and what 

should we be doing? 

Mr. SCOTT. I think if we are concerned about the impact on the 

economy when we are promulgating regulations, it behooves us to 

look at the costs and benefits of the regulation, pretty simple. 

Mr. GARRETT. The Administration doesn’t think so because they 

said they want to scrub all the regulations. There are 195 regulations that are not here, 195 regulations that are just in the formal 

process, they won’t be scrubbed. There are about 300 regulations 

coming out of Dodd-Frank that won’t be scrubbed. So on the one 

hand last night, they said let’s scrub everything, but let’s not scrub 

these 495 regulations and do the cost benefit analysis of it. 

Mr. SCOTT. We, at least, Congressman, should require that any 

regulations now in process be subject to cost benefit analysis. So 

not everything is done. They are in the process of asking for comments on the regulations. They haven’t implemented very much 

regulation. If the Congress were to act now to require this, I think 

it would have a major impact. 

Mr. GARRETT. Okay, thank you. 

Chairman BACHUS. The gentleman from Georgia. 

Mr. SCOTT OF GEORGIA. Thank you, Mr. Chairman. This is very 

frustrating to me, and I think very frustrating to the American 

people when we are trying to talk about jobs. The American people 

are suffering out here. And I think that this discussion from the 

title and moving from the title, not focusing, and I think it points 

to a kind of a schizophrenic approach we have to this whole issue 

of jobs and the Federal Government and the spending. It is kind 

of double-minded. How can we talk about spending money to invest 

in the economy to create jobs, and at the same time, we are talking 

about cutting the budgets, cutting deficits. 

There are those in this Congress who want to see the Federal 

budget cut by 25 percent, but there has been no thought as to what 

that means for employment and jobs. Eighty percent of that cut 

32 

means putting people in the Federal Government on the unemployment rolls. There probably would even be a greater, if we follow a 

pattern of impact on jobs from the Federal Government, of adding 

to the jobless rate. 

And so how do we do both? How do we handle this tug of war, 

this confliction here? And what spending cuts from the Federal 

budget would amount to the least reduction in jobs? There has 

been no talk. Everybody wants to cut, cut, cut, but nobody is stopping to realize the impact that has and will have on the jobless 

rate. What do we do with that? How do we handle this? And might 

the Federal Government be playing a more damaging role as far 

as jobs, not only not being able to create jobs, but the biggest impact we may make is adding to the unemployment that is already 

out there with these Federal workers who will be cut from the 

budget. Can you respond to that? How do we do fit this round hole 

in to a square peg? 

Mr. POOLE. Let me dive in very quickly. We have to remember 

that, of course, our aim is to improve jobs in the entire economy. 

Hiring more people into the Federal Government does not necessarily improve jobs in the entire economy. It may well displace 

people from private employment and that is exactly what I think 

has often happened. You get the surface appearance of more jobs 

because they are on the Federal payroll, or State and local government payroll, but in fact, they are being displaced from private sector job growth. 

Mr. SCOTT OF GEORGIA. All right. 

Mr. TAYLOR. Actually, I don’t think it is a square, circle issue. 

It seems to me there is a consistency here between reducing the 

growth of spending, reducing the share of GDP, if you would like, 

that goes to government spending and reducing joblessness. We 

have had huge increase in government spending as a shared GDP 

in the last 3 years. And unemployment has gone up. I am not saying that is the cause, but you should just think about that for a 

minute. If you look at some of the charts in my testimony, you see 

private investment is driving this unemployment rate. I think a 

closer correlation than you really can understand. But you have to 

think the best thing may be to get this budget under control, that 

may be the best thing to reduce unemployment. 

Mr. SCOTT OF GEORGIA. Let me ask you this, what spending 

could be cut, in your opinion, from the Federal budget that would 

result in the least amount of job loss? 

Mr. KOHN. I think what the Congress needs to do is to think 

about the path of spending over time. So my personal view would 

be that cutting a lot of spending now would probably cost jobs, not 

necessarily whether it is Federal Government jobs or other. We do 

have a 9.5 percent unemployment rate, there are underutilized resources out there. It is not a case of trying to have both under 

these circumstances, but there is a huge amount of uncertainty 

about what the path to fiscal sanity looks like. And I think the 

Congress and the Administration need to get together and figure 

out that path, even if it doesn’t involve cuts today, it will involve 

some adjustments in entitlements. There is just no way that the 

path to fiscal sanity, as Professor Poole pointed out in his testimony, can avoid doing something about Social Security and MediVerDate Nov 24 2008 17:28 Mar 22, 2011 Jkt 064550 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\64550.TXT TERRIE
33 

care spending in the future, but there needs to be a commitment 

to doing something in the future to relieve the uncertainty about 

tax rates and spending. 

Chairman BACHUS. Thank you. The gentleman from Texas. 

Mr. MILLER OF CALIFORNIA. California. 

I love this conversation, fiscal sanity with a $1.5 trillion budget 

deficit. Government has increased spending every year through this 

recession when businesses and the private sector have had to reduce spending. Husbands and wives sit at home determining how 

they will feed their families, pay their rents, pay the mortgage for 

the next month, and manage their finances through the next year. 

And we say, what impact will these cuts have on the Federal Government? Woe is us. If you look at the States, and counties and cities, public employ retirements is bankrupting this country. And we 

are more concerned about how these impacts might impact the 

Federal Government—these cuts might, is a ridiculous argument. 

We need to be competitive globally. And for us to do that, we 

have to stop mandating the private sector. We have to let the business community know and understand that we are not going to 

continue to mandate them tomorrow and steal the money from 

them tomorrow to make us be able to do what we want to do today. 

We are trying to compete with India and China. They have great 

ideas. They are going to grow jobs in their country. And we have 

the EPA closing down the harbor in Long Beach and LA, and the 

Mexicans building one in Mexico because regulation in California 

is driving them out of California. And we worry about what these 

impacts will have on the Federal Government. 

We need to start saying, What can we do to grow the economy? 

And just based on the basic money multiplier, every time we take 

a dollar out of the private sector, that is going to impact the growth 

of this economy. We cannot continue to take from the government 

and think we are creating jobs. No. We are hiring government employees. And what are we producing in the economy? More paperwork. 

And you ask businesses, Why are you not expanding? Because 

bureaucrats in local, State, and Federal agencies are mandating us 

to a degree, putting us through a process that is so protracted, we 

don’t know what to do. 

I got a call from a dairy 2 weeks ago. They use a product on their 

floor that says, ‘‘If you use a product, just notify everybody.’’ You 

can use up to 10 pounds if you want to without any notification. 

You can use 500 pounds if you want to and just notify everybody. 

They used 30 pounds. It didn’t impact police, fire. But they forgot 

to notify one agency. So they were fined by EPA $182,000 because 

they forgot to send a letter. 

Now what does that do to grow the economy? Nothing. And some 

of our witnesses today have talked about reducing spending, controlling regulation, reducing regulatory uncertainty. Basically, 

Dodd-Frank creates a tremendous amount of that. Reducing the 

size of the Federal balance sheet and keeping inflation in check; 

those are great. None of that has to do with the impact on the Federal Government because we don’t tax enough. 

But what we are doing, based on the testimony I have heard 

today, is ruining this economy. We cannot continue to spend money 

34 

we don’t have. And then the President gives a speech saying, ‘‘the 

top 2 percent are just going to have to pay more of their fair 

share.’’ Look at how much they are paying. And every time we take 

more of their fair share, we hurt jobs in this country, because those 

are the people providing the jobs. 

So if we are going to be globally competitive, we need to make 

sure regulations are in check and not burdening the American companies that have to compete with China and India. 

We say China; you can’t even own property in China. If you want 

to build a building, the government is going to own your property. 

You are going to build a building, and they are going to be joint 

partners with you. I have had three people from my community 

who have been held in China and had their passports taken from 

them because they owed a business in China some money. And it 

was a contractual dispute, did not go to court, but the Chinese Government said, ‘‘Until you pay the money, you are not leaving our 

country.’’ Now that is a great democracy. And we are having to 

compete with them. They are also fixing their currency based on 

ours so we cannot be competitive. 

We need to change the direction of this country. We need to stop 

looking to get into people’s pockets and start protecting the American people. We need to say, ‘‘We are not going to regulate you to 

death; we are not going to tax you death. We are going to create 

an environment where we cannot guarantee success, but you have 

an opportunity to succeed.’’ And we are doing quite the opposite. 

So would you like to answer my question? 

I think we are headed in the wrong direction. I think if we keep 

talking the way we have talked in the last 2 years, this country 

is in dire straits. We are going to be in real trouble. We need to 

start talking from the perspective of the American out there who 

knows what they are facing in the economy. They are losing their 

jobs. The ones who have lost it are having to compete with 8 million illegals here who have taken their jobs. And we are talking in 

a presidential speech of making everybody legalized in this country 

and not protecting the American worker. 

We need to be on the side of the American workers. People who 

are in this country just trying to survive, are losing their homes. 

We need to change the direction of this government and make it 

responsive to them. This is supposed to be a democracy of laws established by the people to govern themselves. And we have become 

so heavy-handed, that does not work any more. 

I yield back. Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. 

Mr. Chairman, I think that if we are going to properly resolve 

or solve a problem, we at least ought to define the problem and 

know what the problem is. One can conclude that the elimination 

of a finger is appropriate for a hangnail, but I am not sure that 

is the best way to resolve the problem. 

Those who contend that Fannie and Freddie are the problem 

have to ask themselves: Did Fannie and Freddie mandate 3/27s 

and 2/28s? Did Fannie and Freddie mandate loans without proper 

documentation? Did Fannie and Freddie create an environment 

35 

such that loans were made and those who made the loans were not 

responsible for them; they would simply pass them on to others? 

Did Fannie and Freddie create prepayment penalties that coincided 

with teaser rates? Did Fannie and Freddie conclude that the persons who created loans could have a yield spread premium that 

would allow them to force consumers who had good credit into 

subprime loans? 

All of these things can be traced back to the Alternative Mortgages Transaction Act. And those of you who would like to, you 

may check that and you will find that I am close. I may not have 

the title exactly right. But we deregulated. We decided that we 

would allow for greater products in the marketplace. And when we 

decided to deregulate and allow these greater products in the marketplace, we didn’t consider the unintended consequences all of 

these products in the marketplace going on and being securitized 

and passed around the world, in fact; not just in the United States 

of America. 

So we really ought to properly define the problem before we decide we are going to eliminate Fannie and Freddie. Fannie and 

Freddie by any name will do the same thing. So those of you who 

want to give us another name—Annie and Teddie, Rough and 

Ready—you are still going to have the same circumstance to contend with. And at some point, we have to have a serious discussion 

about how are we going to continue to allow an individual with 

good credit to get a loan and allow that loan to move from the portfolio of the bank to a secondary market? That is really what we are 

going to have to at a some point have a look at. 

Next point: There is a lot of talk about uncertainty. Why do we 

focus solely on the uncertainty that businesses have? Consumers 

have uncertainty, too. Multiple uncertainty is what we are dealing 

with. And the notion that millionaires create jobs ought to be dispelled today. Millionaires don’t create jobs. Demand creates jobs. 

Give a millionaire another million dollars, and if there is no demand, the millionaire pockets the million dollars, and he goes on 

or she goes on her way. If there is demand, then jobs will be created, because people respond to demand. No demand, no job creation. 

So we have to find a way to not only allow those who would facilitate the production of jobs by virtue of having capital to do so, 

but we also have to understand that there has to be a means by 

which this uncertainty that the consumer has can be overcome 

such that the consumer is willing to go back into the marketplace. 

Without the consumer in the marketplace, without the demand, the 

jobs don’t get created. 

Dr. Kohn, do we have jobs created when there is not demand? 

Mr. KOHN. At the current time, there is an insufficiency of demand, I agree. 

Mr. GREEN. Let me just ask you, if I may, because time is of the 

essence. I am under the yellow light. You agree that you have to 

have demand to create jobs, true? 

Mr. KOHN. Yes. 

Mr. GREEN. Do you also agree, Dr. Kohn, that these exotic products were not mandated by Fannie and Freddie; that the genesis 

for them was a lack of regulation brought on by deregulation? 

36 

Mr. KOHN. I think there is a lot of blame to go around. In the 

private sector— 

Mr. GREEN. But do we want to overlook that blame, is the question. 

Chairman BACHUS. Let me— 

Mr. GREEN. My time was not up. It was on yellow. 

Chairman BACHUS. Let me say this. Let’s just pause for a second. 

The last vote is now going to be at 12:30. We have a second panel. 

After this question, and then Mr. Neugebauer, if we could go to the 

second panel, is everybody in agreement? 

Mr. Pearce, too? 

We will go two on each side. And then you can all question the 

second panel. Would you rather have your time on this panel? 

This panel? The second panel? 

We will reserve two for the second panel, and you all will go first 

on the second panel. 

Mr. GREEN. Mr. Chairman, may I just restate that question? 

Mr. KOHN. Fannie and Freddie did not create those CDOs and 

those exotic mortgages. And they came to the party kind of late. 

I do think that Fannie and Freddie were a systemically risky operation where the losses were socialized; the gains were privatized. 

And they need to be reformed. It is a position that— 

Mr. GREEN. And if I may say so—my time is up—I absolutely 

concur with you, but let’s not overlook how the products got into 

the marketplace. 

Mr. KOHN. The private sector bears plenty of responsibility for 

what happened. 

Mr. GREEN. Thank you, sir. 

Chairman BACHUS. Thank you. 

Thank you, Mr. Green. And the last vote is now going to be at 

1:30. They have announced they are going to close the offices sometime before 4:00. 

Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

This is a great panel, and I wish we were going to have more 

time and could focus in more specifically on some of these issues. 

But, Professor Scott, one of the things that I heard you say a 

while ago was about the regulatory agencies doing some kind of 

cost-benefit analysis kind of before they get into the rulemaking 

process. And I think I heard you also say that you thought that 

they ought to have possibly a comment period on the analysis before they moved into the rulemaking process. I think that is a good 

idea, and I think that is, in the future, one of the things that may 

be something we may want to embed into the legislation. Would 

you agree that that would be beneficial? 

Mr. SCOTT. Yes, I do agree with that. The way the process works 

is when an agency proposes a rule, if it were to work correctly, they 

would do a cost-benefit analysis to justify the proposal that they 

were putting forward. We do build into our system comment periods on proposals. So insofar as cost-benefit was part of that, there 

would be an opportunity to comment. 

I think a key part of what I am saying is we should have an expert comment on that, which is OIRA. It is part of OMB. It is their 

duty to comment on cost-benefit analysis done by the non-indeVerDate Nov 24 2008 17:28 Mar 22, 2011 Jkt 064550 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\64550.TXT TERRIE
37 

pendent agencies under current executive order. I think that 

should be expanded. They should comment on the independent 

agency’s cost-benefit analysis, but with a difference from the nonindependent agencies, that comment would not be binding. So we 

would preserve the independence of the agency to take those views 

into account, do with them what they might. 

Mr. NEUGEBAUER. I think one of the things that many of us are 

concerned with is we had a CBO estimate of what it was going to 

cost to stand up Dodd-Frank. Chairman Bachus and I are going to 

send a letter today to all these agencies that were impacted by 

Dodd-Frank to actually get them to furnish us a financial model of 

what they think implementation costs are going to be and continuing costs are going to be for this pretty massive blanket of new 

regulation. And I think that is appropriate. I wish maybe we would 

have done that in a little bit more detail before we got here. 

And when we talk about jobs, we need to get back to that. But 

when I look at Dodd-Frank, and I am going to ask the panel to respond, can you point to a provision in any of Dodd-Frank that 

made capital more available, that it made it more accessible, and 

that it lowered the cost of capital for companies and people who access capital? Can you point to me where in Dodd-Frank we actually 

maybe accomplish something that is important to job creation in 

this country, and that is capital access and cost? 

One of the things that I believe we have created in this country—back when people were making lending decisions and investment decisions, they were looking at credit risk, interest rate risk. 

I will tell you that Congress has created a new risk, and I think 

we need to start measuring it, and it is called regulatory risk. That 

entities lose their propensity for innovation or providing certain 

kind of products with some concern that they are going to somehow—either there will be a regulation down the road that will prevent them from continuing that business model or, even worse, 

that whatever road they have gone down, somehow somebody interprets a regulation that that is not appropriate. 

So, Dr. Poole, I will start with you. 

Mr. POOLE. I do not believe that Dodd-Frank was constructive 

legislation—and that it missed the biggest problem—two biggest 

problems; one is obviously Fannie and Freddie, and the other is a 

frontal attack on ‘‘too-big-to-fail.’’ 

Mr. TAYLOR. I agree with those two points, plus it does things 

that really have nothing to do with the financial crisis. I would 

mention the new Financial Consumer Protection Bureau on that 

last. 

Mr. KOHN. I think Dodd-Frank is not a perfect piece of legislation; I don’t think there has ever been such a thing. But it, combined with the capital requirements—higher capital requirements 

and better supervision—will make this financial system safer and 

more resilient. So will it increase credit tomorrow or next year? No, 

probably not. But will it help to prevent the kind of squeeze in 

credit that we had last year and the year before and the year before that? I think it reduces the odds on that. 

Mr. SCOTT. I am less sanguine about our capital rules than my 

colleague, Dr. Kohn. This is again, as I said before, not so much 

Dodd-Frank, but the Basel process over in Switzerland that is overVerDate Nov 24 2008 17:28 Mar 22, 2011 Jkt 064550 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\64550.TXT TERRIE
38 

burdening the financial system. And I think that Congress needs 

to get into the weeds on this. We can’t let Basel go on without supervision. I think it is irresponsible. 

I think there are two examples where I think actually DoddFrank may have improved things. First of all, I think in the 

securitization process, there was a lack of disclosure as to what the 

risks were on the underlying loans. And I think that actually impeded the process, made it worse. I think Dodd-Frank has corrected 

that. 

I think the provision in Dodd-Frank for central clearing of derivatives is going to reduce risk and make capital more available. 

I think what would be a very good idea, Congressman, is to do an 

inventory like this in a systematic way, which has not been done. 

And I think your question is very well taken. 

Chairman BACHUS. The gentleman from New Mexico. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Again, we have 5 minutes. I don’t want to cut you short, but I 

am going to ask about five questions. First of all, just in response 

to how many jobs we can cut or how much spending we can cut 

without hurting the economy, New Zealand tried this back some 

years ago, and they cut 63,000 jobs out of one department, from 

63,000 down to 1, and their economy jumped from the bottom third 

of the world’s economies to the top third. 

So, on the questions, first of all, I think, Mr. Taylor, the Federal 

Reserve started in 2008, October of 2008, paying interest on reserves, IORs. To me, that looks like that is one of the regulations 

that is somewhat impeding growth because it is causing banks, giving banks reasons that they would not to lend money; instead, they 

would hold it in the safe harbor of reserves. Is that a correct viewpoint? Is that the one that is incorrect? Should we reconsider that 

policy? 

Mr. TAYLOR. The rate is quite low at this point. I would be more 

concerned when rates get higher, what is going to happen with 

that—at this point—but now it seems to me that would be something to focus on as a problem. 

Mr. PEARCE. We are losing the entire multiplier effect when we 

hold those bank reserves drawing interest. 

Mr. TAYLOR. When the Federal Reserve does begin to have to 

raise rates, I think it is important for them to go back to the strategy they used to have, which does not necessarily entail paying interest on reserves. 

Mr. PEARCE. Mr. Poole, you talked about Medicare as being a 

problem. Has anyone to your knowledge ever done a study—I have 

talked to doctors who tell me for their time, they get maybe $15, 

$20 for seeing a patient. Is there anyone who has ever taken a look 

per transaction in the medical doctor’s office how much the bureaucracy in Washington actually charges and receives? If we are 

paying the doctors $15, I would guess we are paying close to $100 

a visit. Is there anyone who has actually quantified that? 

Mr. POOLE. I am not an expert on health care— 

Mr. PEARCE. You mentioned it. I am not asking you to be an expert. Is there someone who has quantified anything like that? You 

go into great detail, is the reason I am asking you. You go into 

great detail about Medicare. 

39 

Mr. POOLE. I don’t know the answer to that. 

Mr. PEARCE. You don’t the answer to that. If you find that, I 

would appreciate knowing. I suspect we pay the bureaucrats far 

more per transaction than they pay the doctors, which, to me, is 

upside-down. 

Mr. Kohn, with the printing of money that the Federal Reserve 

has done, is there a risk in your opinion of inflation or hyperinflation in the near future? 

Mr. KOHN. No, not of inflation or hyperinflation in the near future. There is an inflation risk over the longer run. 

Mr. PEARCE. You said no. I am willing to take no. They are seeing extraordinary inflation in China and other countries in food 

right now. The price of gold has skyrocketed in the last year. The 

price of silver has almost doubled in the last year. Are those not 

signs that the dollar is losing confidence? 

Mr. KOHN. I don’t think so. 

Mr. PEARCE. Okay. That is fine. You don’t think so. I am really 

pressed for time. You don’t think so, that is fine. 

Mr. Scott, you mentioned on page 14 that you believe the Federal 

Reserve has the expertise for making such decisions as blah, blah, 

blah, whatever is in your report, and yet when I look at the Federal Reserve, I asked Mr. Greenspan in this room before he left, 

and I asked Mr. Bernanke, ‘‘Don’t you think the hedge funds are 

causing us great uncertainty, maybe the instability of our entire 

economy?’’ Both dismissed that. So we had long-term capital as a 

pre-warner, and then we had the collapse of the rating institutions 

and the insuring institutions before the major collapse. 

With all the expertise that you have put in the Federal Reserve, 

why do you think that they decided not to do anything? You declared that you believe in them. You declared that they do it. Why 

do you believe they ignored the warning signs? 

Long-term capital collapse, are you familiar with that collapse? 

Mr. SCOTT. Yes. 

Mr. PEARCE. And the collapse of the rating institutions, we had 

four insuring institutions that collapsed about a year before we 

took those TARP votes, which I opposed. So any idea, as you place 

a great amount of faith in the Federal Reserve, any ideas why they 

may be, with all the expertise you attribute to them, they didn’t 

get the thing right? 

Mr. SCOTT. I can’t answer that. 

Mr. PEARCE. You can’t answer that. Would you speculate that 

Dodd-Frank is really dealing—there are many things that deal 

with derivatives and the hedge funds in Dodd-Frank. If we created 

a stable currency by stopping the printing of money, don’t you 

think that many of the things that we need to regulate—and your 

presentation deals greatly with the regulatory process—don’t you 

think those regulatory requirements disappear, to an extent, if we 

create a stable currency, one with value that is stable over a long 

period? 

Mr. SCOTT. No. 

Mr. PEARCE. No. So hedge funds—you would be required to need 

a hedge fund if you had a stable currency. I think maybe a little 

bit differently. 

Mr. Chairman, thanks for the time. 

40 

Chairman BACHUS. Thank you. 

The gentleman from Connecticut. 

Mr. HIMES. Thank you, Mr. Chairman. 

I have been sitting here listening a little incredulously to the discussion on debt, which is not unimportant, but of course, there is 

nothing about this committee that has jurisdiction over either the 

revenue side of that or the appropriation side of that. 

Nonetheless, I take very seriously what I might call the consensus at the table that this is a very serious issue. We heard it 

from the President last night. We are, I think, developing a consensus in this Chamber that we need to address it in a serious 

way. 

Though I do have questions that are germane to the activity of 

this committee, I do want to take a minute or two to pursue the 

future of debt. Looking back, we pursued Keynesian policies in the 

last couple of years. 

Professor Taylor, if we had more time I would ask you why you 

considered those deviant as opposed to orthodox. Of course, 10 

years prior, we added entitlements in Medicare, fought wars, and 

cut taxes in ways that led to where we are today. 

But I want to look forward and just ask questions here, yes or 

no questions. I have been watching the policies proposed by the Minority. And let’s just take the two landmark policies, if you will. 

One is an extension of the 2001 and 2003 tax cuts which the Congressional Budget Office, which is nonpartisan, tells us is probably 

$4 trillion in deficit over 10 years. Now I understand that they may 

be off. They may be off by some. But does anybody on the panel 

here fundamentally think that the CBO is dead wrong about the 

$4 trillion over 10 years? 

Okay, I don’t see anybody saying that. 

The Republican Study Committee has said and proposed $2.5 

trillion in cuts over 10 years. And we will talk about that. That is 

going to be a difficult thing. We do need to cut. I applaud their effort. I am sure I am going to disagree with things. But let’s just 

accept that they can get $2.5 trillion. 

Now here is where I need the economists: Help me with my 

math; 10 years, $4 trillion minus $2.5 trillion. Can I conclude that 

the two hallmark proposals of the Majority will add, over 10, years 

$1.5 trillion to the Federal debt? Anybody disagree with that math? 

No. 

Does anybody support—and I heard you, Dr. Poole and Professor 

Taylor in particular, on the urgency of addressing this—does anybody support those two policies in combination as things that this 

Congress should do? 

Mr. TAYLOR. The policy, it seems to me, is consistent with Professor Poole, is to get this deficit down and have CBO score a reduction in the debt rather than an explosion. And I think you can 

do that without any tax increases. I think it is very possible to get 

spending back to where it was in 2008, as is being proposed. And, 

moreover, I think as a share of GDP, there is no reason why we 

can’t— 

Mr. HIMES. But, Professor Taylor, time is short. You didn’t disagree with the CBO estimate. And you—we are all accepting that 

there can be $2.5 trillion. We are stipulating that, not accepting it. 

41 

So we are all agreeing that we are going to see an expansion of the 

deficit by $1.5 trillion. My question was: If those two policies in isolation were the two things we got done, would you be supportive 

of those two things? 

Mr. TAYLOR. When you say expansion, our current tax rates—we 

have—just been extended for 2 years. I think it would be good to 

just continue that permanently. 

Mr. HIMES. And accept the— 

Mr. TAYLOR. When you say what are revenues going to be, revenues are not the problem. Those are the same revenues we are getting now. Where is the loss of revenues relative to some hypothetical of tax increases? 

Mr. HIMES. So, over 10 years, if we extend beyond the 2-year period in which we have extended the 2001 and 2003 tax cuts, there 

is a revenue effect that the CBO has estimated over 10 years. 

Granted, we have already taken a trillion of that, which is $4 trillion. That is my logic. You didn’t disagree with me that $1.5 trillion 

is added to the deficit if those are the two policies that we enact. 

I want to come back because I actually have—this is not germane 

to this committee. I actually have a few questions that are germane. 

Dr. Poole, I am very interested in something you said about the 

possibility that the private market could fully substitute for the activities of Fannie Mae and Freddie Mac. The people I have talked 

to suggest that the 30-year fix, the refundable, long-term piece of 

paper, probably doesn’t exist in the market, or, if it does, it exists 

at a very substantial premium to what it exists today. No government guarantee on the 30-year fix. Do you agree with that? And 

if so, do you have an estimate for how much more expensive the 

30-year fixed mortgage is if there is no government guarantee or 

implicit subsidy? 

Mr. POOLE. I don’t have that estimate, but I will tell you this: 

If it is dramatically more expensive and you want to propose that 

it be guaranteed by the Federal Government, then it is the taxpayers who are picking up that cost. 

Mr. HIMES. Agreed. But we could take the policy decision to, if 

you will, implicitly subsidize, as we have, the existence of a 30-year 

fixed piece of paper. I am just curious about what the effect is on 

the availability of the 30-year fix, which, let’s face it, it is mom, 

apple pie, and core to American families. What is the pricing effect 

if we take away all government subsidy and intervention in that 

market? 

Mr. POOLE. The mortgage market works just fine in other countries that do not have GSE-type institutions. And I don’t know why 

you should conclude that the mortgage market can’t work here; 

that there is something special about the United States’ mortgage 

market. 

Mr. HIMES. Does the 30-year fixed mortgage exist in those countries? 

Dr. Kohn, you are nodding ‘‘no.’’ 

Mr. POOLE. Probably not as extensive as the United States. 

Mr. HIMES. My time has expired. 

42 

Mr. POOLE. The 30-year mortgage is actually typically not outstanding for anything close to 30 years. Most people are repaying 

them in about 7 years, anyway. 

Mr. HIMES. Thank you. 

Mr. Chairman, I yield back. 

Chairman BACHUS. Thank you. 

Mr. Duffy. 

Mr. DUFFY. Thank you, Mr. Chairman. I just need to follow up 

on a few points that my colleague from Connecticut made. He is 

talking about increasing taxes, and he is looking at the amount of 

money that, if we increase taxes, would come into Federal coffers, 

I believe. Is there a correlation between the amount of taxes an investor may pay and the decisions they make to invest in their businesses or ideas? And I guess I will throw that to you, Dr. Poole. 

Mr. POOLE. The answer is, of course. That is a no-brainer. Of 

course there is, because taxes affect the rate of return on an investment. 

Mr. DUFFY. So it is fair to say that we aren’t going to look at the 

same GDP pie and say, if we raise taxes by 4 percent on a certain 

segment, we are going to be drawing from the same size of GDP. 

That very well may shrink because there is not enough—there is 

not as much investment, there are not as many jobs. There is not 

as much economic activity. 

Mr. HIMES. Will the gentleman yield for 5 seconds? 

Mr. DUFFY. No. 

Mr. POOLE. I am not in favor of tax increases as—following my 

colleague here, John Taylor. But my emphasis above all is that tax 

increases cannot solve the problem. If we do not go full-bore on the 

spending side, we can’t solve the problem. I would be willing, if you 

had a grand compromise, possibly, depending on the nature of it, 

to accept some tax increases. But if Congress keeps coming back 

to tax increases to solve our problem, that solution will not work. 

It will fail. 

Mr. DUFFY. I would agree with you. Did you hear the State of 

the Union speech last night? 

Mr. POOLE. Yes. 

Mr. DUFFY. The President had proposed we cap spending at current levels as a way to get our budget under control. Do you think 

that is a sound plan to get our budget under control? 

Mr. POOLE. I do not because I think that—it depends on what 

spending you are talking about. I suppose that he is talking only 

about so-called discretionary spending. 

Mr. DUFFY. I think he was, yes. 

Mr. POOLE. There are essential functions of government that are 

financed that way, such as the work of Congress, the court system, 

national defense, the maintenance of domestic law and order, and 

if we do not tackle the entitlements, then we are going to fail. 

Mr. DUFFY. Yes. I am going to pivot here quickly. I think most 

of the folks in America here when they looked at this finance reform bill, or Dodd-Frank, they were concerned that it didn’t address Fannie and Freddie. There was some outcry in northern Wisconsin especially. And I think folks are concerned about having a 

government backstop to these organizations. 

43 

I have also heard, though, if we privatize Fannie and Freddie, 

there is a concern for what happens to our 30-year fixed rates, our 

mortgage rates, and also what that does to our housing market. 

Would any of the panel members speak to whether you favor 

privatizing Fannie and Freddie and what that would do to 30-year 

fixed rates? 

Mr. POOLE. I am absolutely opposed to privatizing them, because 

it would put them back—after all, they were private companies before they were ‘‘conserved.’’ But they had such strong political ties 

that they ended up costing the American taxpayer a huge amount 

of money. And I would not want to risk that happening again. 

Mr. DUFFY. Okay. Anyone else? 

Mr. TAYLOR. I like this idea of gradually phasing them out 

through changing the conforming loan limits. I think that is a good 

way to proceed. Otherwise, you could slow it down a little bit if you 

are worried about some of the particular mortgages, but I think we 

should do that. 

Mr. KOHN. I think we should constrain the role of Fannie and 

Freddie. I don’t think they should be allowed to be portfolio lenders, for example. I think the Congress needs to think carefully 

about whether it wants to encourage home ownership among certain classes of folks, and a new, smaller Fannie and Freddie that 

was funded by insurance charges, for example, on the users might 

be part of that thing. I do also think we need to separate concerns 

about affordable housing from these entities. I think conflating 

those is part of what led to things. So address affordable housing 

separately. 

Mr. DUFFY. Is there a correlation now with 30-year fixed rates 

and the implicit belief that government is backing up these loans? 

Mr. POOLE. Not necessarily. That wouldn’t have to be the case. 

And, incidentally, locking people into 30-year mortgages is not 

necessarily a good idea because it may reduce their job mobility. So 

I would let people make that choice themselves. I don’t understand 

why the government should subsidize it and encourage people to go 

one direction or another. 

Mr. DUFFY. Very well. Thank you very much. I appreciate it. 

I yield back. 

Chairman BACHUS. Thank you. Our final questions will come 

from—no, we have two more members. 

Mr. Canseco. 

Mr. CANSECO. Thank you very much, Mr. Speaker. 

These questions are directed to Professor Scott regarding DoddFrank. Dodd-Frank hands over even more regulatory power to the 

SEC and to the FDIC and to the Federal Reserve. These are the 

same agencies who were in charge during the last 10 years. Yet, 

during that timeframe, we have seen gigantic accounting scandals, 

such as Enron and Worldcom; billion-dollar Ponzi schemes, Madoff 

and Stanford; and a mortgage meltdown that has left millions of 

Americans unemployed and wondering if they will be able to pay 

their bills. 

The regulation was there. The money was there. But regulation 

failed. And now we have given even more power to a lot of these 

same agencies that failed the American people this last decade. Do 

44 

we have any reason to think, in your opinion, that more rules and 

more money will produce a different outcome this time? 

Mr. SCOTT. I would like to think we learn by experience, Congressman. I think many of these agencies have learned lessons 

from these crises, and hopefully things will be improved. 

But I believe fundamentally that what has been lacking in the 

rulemaking process of these agencies is any serious cost-benefit 

analysis. And I think it is incumbent upon the Congress to charge 

them with doing this. 

Mr. CANSECO. Has recent legislation really altered the underlying structure of our regulatory agencies, which is what really 

needed to be changed? 

Mr. SCOTT. Structure? 

Mr. CANSECO. Yes. 

Mr. SCOTT. Yes, absolutely. I commented on this in my written 

testimony. FSOC is not the answer to our structural problem. The 

President talked last night about reforming the Federal Government structure. Part of that Federal Government is the financial 

regulators. And since Secretary Paulson issued his Blueprint, our 

committee has issued recommendations for serious consolidation. 

I don’t think—if you have the best policies in the world and you 

don’t have a good way of implementing them, they are not going 

to work. And I think we failed on that. Dodd-Frank did not accomplish a real fundamental change in the regulatory structure our financial system has desperately needed. 

Mr. CANSECO. Let me move into a little different area of DoddFrank. 

I come from Texas, and I have a huge swath of a lot of small 

towns, hamlets, and villages all through West Texas. In November 

of 2007, one month before the recession began, the unemployment 

rate in the United States was 4.7 percent. Today, it has actually 

doubled to 9.4 percent. Small businesses have been hit the hardest. 

According to the Small Business Administration, firms that employ 

fewer than 100 workers account for about 35 percent of the workers in our economy. 

In my district, which is the 23rd District of Texas, these companies are often financed by small community banks. And, unfortunately, it is these small community banks so vital to our economy 

that will suffer the most from overregulation, such as Pecos County 

State bank in Fort Stockton, Texas. It takes in over 50 percent of 

its deposits in the Fort Stockton area. Before the passage of DoddFrank, their annual audit cost them $30,000 to complete. And they 

have informed me that now it costs them over $112,000 to perform 

the same audit because of all these new regulations. 

Regulators have continually said small banks should not be overburdened, yet they are. Do you believe the supposed benefits that 

have come from Dodd-Frank, aside from what you have just alluded to, outweigh these costs to small banks that have resulted 

from this regulation—legislation? 

Mr. SCOTT. Congressman, I haven’t done the analysis, but I 

would doubt it. There is a parallel here with SOX’s 404 and its application to small business. And we went through a long period 

where everybody wanted to fully apply SOX 404 to all businesses. 

But to small businesses, it was a big deal. They had these costs, 

45 

the small businesses; they couldn’t afford them. So, finally, one 

good feature of Dodd-Frank for sure is a permanent exemption of 

the small business from part of 404. 

So I think we need to take a serious look at how all these regulations are, as part of our cost-benefit analysis, impacting small business. Because that is where our economy starts, with small business. 

Mr. CANSECO. Ergo, a bad regulation. 

Mr. SCOTT. Yes. 

Mr. CANSECO. I yield back the balance of my time. 

Chairman BACHUS. Thank you. 

The gentleman from Ohio, Mr. Stivers. 

Mr. STIVERS. Thank you, Mr. Chairman. 

I just want to follow up on a question from the gentleman from 

Texas and something that Professor Scott has been talking about 

all day. Does anybody on the panel have any reason why all these 

independent agencies should not perform a basic cost-benefit analysis? 

Thank you. 

The second question I have is for Dr. Taylor. 

Dr. Taylor, you talked about how private investment—and you 

had the graph about how private investment drives our economy. 

And with businesses sitting on more retained earnings than any 

time in the last 50 years, is there a prescription to help them take 

that cash they are sitting on that obviously has the potential to 

create jobs and help them do that? 

And please try to be brief. 

Mr. TAYLOR. This uncertainty out there, which is continuing 

partly just because the economy is still—recovering is still somewhat still fragile, but in addition, I think all these regulatory 

issues, the uncertainty about what is going to happen with the 

debt, uncertainty about what is going to happen with taxes, uncertainty about regulations, uncertainty about monetary policy, I 

think those are all factors that could be addressed and would lead 

to a more healthy attitude about investing. 

Mr. STIVERS. Thank you. 

Something Dr. Kohn said earlier I want to kind of address to the 

whole panel. Doesn’t innovation help encourage demand? In fact, it 

is the psychology of demand. I would use the iPad as an example. 

I don’t know if any of you own an iPad, but that is something that 

was just an idea a year and a half ago, and now everybody owns 

one. 

I guess I will put it to Dr. Poole—or Dr. Kohn, since you have 

said it before, does innovation help create demand? 

Mr. KOHN. Of course it does. New products, new innovations, 

new ways of doing things help increase productivity, and over time, 

productivity increases demand and living standards. 

Mr. STIVERS. Thank you. 

To Professor Scott, you talked a little bit about—your third or 

fourth point was about regulatory reform. And I can count seven 

agencies if you are a big financial institution: the SOC, the SEC, 

the FDIC, the Federal Reserve, the new Bureau of Financial Protection; and the OCC. I don’t know if I missed anybody. I think 

that is seven. And with the 200 new regulations that are coming 

46 

in Dodd-Frank, if any of them are in conflict, how do these companies deal with this? 

Mr. SCOTT. The answer is, not well. FSOC has limited authority 

in some instances to try to reconcile differences between the ageold fight between the SEC, and the CFTC was granted some kind 

of muscle. But apart from that, we have seen the FDIC, for instance, disagree with the SEC on securitization issues, retention 

questions. This is going to go on. 

Mr. STIVERS. Doesn’t that actually reduce the ability to get capital to businesses and create jobs? 

Mr. SCOTT. Absolutely. Dysfunctional regulators are not helping 

our economy. 

Mr. STIVERS. Thank you. One other question that I had was, I 

talked to a banker, a small community banker from First Community Bank, Roger Blair, in my area. He told me a story about a regulator. He has a gentleman who borrowed money for a commercial 

building 5 years ago. He has never been a day late on a payment. 

The cash flows are exactly the same. The building is leased the 

way it was at the beginning. The appraised value has gone down, 

obviously, by about 50 percent. And the regulators came in and 

made him write that loan down by 50 percent. So every month 

when the man makes his payment, Roger has to basically find profit against a bad debt. Doesn’t that reduce the amount that First 

Community Bank that Roger Blair is the CEO of has available to 

lend. 

Dr. Poole? 

Mr. POOLE. The answer is yes. But we do need to be careful 

about picking out particular cases, because you need to look at regulation— 

Mr. STIVERS. Let me ask you a follow-up question. I totally understand. Do bankers make loans on cash flow, or do the bankers 

make loans on loan-to-value? Because my grandfather was a banker. He made it on loan-to-value. My father was a banker. He made 

it on cash flow. And I am pretty sure the bankers today make it 

on cash flow. 

How do bankers make loans today? 

Mr. POOLE. The problem with doing it only on cash flow is that 

if you have good reason to believe that the cash flow is going to 

stop, then the loan may be in trouble. 

Mr. STIVERS. I understand. But what really determines whether 

a loan can be paid back? 

Mr. POOLE. Obviously, the cash flow. 

Mr. STIVERS. Thank you. I have just one last question. This is 

for the entire panel. Do we have a revenue problem in this country, 

or do we have a spending problem? 

Mr. POOLE. I have said over and over again, spending. 

Mr. TAYLOR. Spending. 

Mr. KOHN. Entitlements. 

Mr. STIVERS. That is a good point. 

Mr. SCOTT. I plead ignorance. I am not the economist on the 

panel. 

Mr. STIVERS. Thank you. 

I yield back. 

Chairman BACHUS. Thank you. 

47 

Mr. Schweikert. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

I don’t want this to come across as too esoteric. When we look 

at the debt overhang, whether it be nonperforming mortgages or 

the nonperforming assets, how much of a hindrance, in your opinions, is that to economic growth and job creation? I have been 

spending a lot of time looking at the amount of MBS out there, 

other assets that are not performing but are still sitting on our 

books. What is that doing to us growth wise? 

Mr. KOHN. On the books of banks, for example? 

Mr. SCHWEIKERT. Banks, or even within the secondary markets. 

Mr. KOHN. So I think certainly the increase in nonperforming 

loans and problem loans took capital away from banks. They needed to reserve for it, and it probably made them much more cautious 

in lending. I think there is some sense now that things are beginning to peak out and that, as the economy recovers, nonperforming 

loans would go down. And as I think one of your colleagues pointed 

out before, some of the more recent information from the Federal 

Reserve is that banks are becoming a little more aggressive in 

making those loans. Certainly, the increase in bad loans was a 

problem for banks that they needed to address. And that probably 

impinged on their ability to make loans for a while. 

Mr. SCHWEIKERT. Mr. Chairman, where I am partially heading 

with that is I am still stunned how much is still sitting on the 

books or is in the process of still moving into, particularly for myself, who focuses often on the real estate market, the amount that 

is delinquent but not actually technically in foreclosure. 

Just in my county, Maricopa County in Arizona, I have 50,000 

residential units that have been notified of foreclosure, and it is 

often said there may be 2, 21⁄2 times that many that should have 

been notified. 

Mr. KOHN. I think moving through this problem quickly is one 

of the things that will help to reduce uncertainty, but it is a very 

difficult problem, given all the servicing that is scattered, the second mortgages, etc. But I agree that this overhang, the so-called 

shadow inventory of homes that might be foreclosed against or 

probably will be foreclosed against, is hanging over the housing 

market and impeding the recovery of that market. 

Mr. POOLE. And will likely for some years to come. It is just a 

very big problem we dug for ourselves. 

Mr. SCHWEIKERT. Mr. Chairman, the last part. 

Does anyone have a brilliant suggestion on how we push this 

nonperforming overhang through the system; how we incentivize 

both lenders, secondary holders, whoever it may be, to help us 

chew this up? Because we are turning what appears to be a fewyear real estate depression and we are going to make it last well 

over a decade unless we get this off our books. 

Mr. POOLE. I will just take a quick stab at that. I think we need 

to let that be done primarily in the private sector. I think the efforts of government to get into that business have simply not been 

very successful. And as I look at the numbers, the number of foreclosures that are assisted in some way by the Federal programs is 

simply not going to the heart of the problem. 

48 

Mr. KOHN. I don’t have any suggestions. It is a very difficult 

problem. The private sector is bringing more resources to bear on 

this issue. I think they are concerned about litigation, obviously. I 

don’t have any quick answers to this very difficult problem. 

Mr. SCHWEIKERT. Mr. Chairman, thank you very much. Many of 

us believe, unless we can push through much of this nonperforming 

inventory, we are never going to hit our true bottom and never 

going to start to work our way back up. 

Chairman BACHUS. Thank you. 

The first panel is dismissed. We appreciate your testimony. 

The Chair notes for the hearing record that members will have 

30 days to submit additional questions to this panel. 

At this time, I will recognize Ms. Waters for an unanimous consent request. 

Ms. WATERS. Mr. Chairman, I have an unanimous consent request to enter two statements in the record, one from the National 

Low Income Housing Coalition and the other from the Credit 

Union National Association. 

Chairman BACHUS. Thank you. 

I also have an unanimous consent request that we introduce a 

letter from the Associated Builders and Contractors. 

If there is no objection to either request, they are so granted. 

We welcome the second panel. Thank you. 

I would like to take this opportunity to introduce one of the witnesses today who is a former intern of mine, a congressional intern, 

Eric Hoffman. His mother, back in, what was it, 1998— 

Mr. HOFFMAN. That is correct. 

Chairman BACHUS. —mortgaged her house and started a small 

business, which today is Hoffman Media, and has a staff of 135 and 

net sales or revenue of $42 million and publishes several magazines. Eric, once he graduated from the university, joined that office. He had, about a month and a half ago, called concerning some 

of the regulations that we had passed and how he was afraid that 

it would affect their funding going forward. So, we will listen to his 

testimony. 

One of our other witnesses, Mr. Charles Maddy, is president and 

executive officer of Summit Financial Group. Located in—is that in 

Kansas? 

Mr. MADDY. West Virginia. 

Chairman BACHUS. Mr. Andrew Bursky, managing partner of 

Atlas Holdings. Where is that located? 

Mr. BURSKY. In Greenwich, Connecticut. 

Chairman BACHUS. Mr. Ken Brody, partner, Taconic Capital. 

Where is that located? 

Mr. BRODY. New York City. 

We welcome all four of you gentlemen. Somebody had a flight at 

4 o’clock, or was that the first panel? So we will be through by that 

time. 

So we will start, Mr. Hoffman, with your testimony. 

STATEMENTS OF ERIC HOFFMAN, EXECUTIVE VICE PRESIDENT AND CHIEF OPERATIONS OFFICER, HOFFMAN MEDIA, 

LLC 

Mr. HOFFMAN. Great. 

49 

I want to begin by thanking Chairman Bachus and the members 

of the Committee on Financial Services for the invitation to speak 

today. 

I have had the privilege to work at our family business, Hoffman 

Media, and be part of an incredible growth story. As I strategize 

about both our company’s continued growth as well as small business growth across the United States, I am concerned by recent 

changes in financial regulation, health care, and taxes. 

In this testimony, I will share with you the history of Hoffman 

Media; the concerns that I have on the Volcker Rule and long-term 

negative effects on small business and growth; and concerns of future burdens caused by health care reform and higher taxes. 

Overall, I am concerned that the significant changes we are seeing will hurt our future ability to grow, as uncertainty is the worst 

headwind we face. I remember President Obama said last night 

that we can do big things. It is possible to do big things, but uncertainty prevents that. 

Hoffman Media was founded in 1998 by my mother, Phyllis Hoffman, who currently serves as chairman and CEO. After successfully working for 5 years at a large publicly-traded company, she 

left the business. She acquired two magazines and financed the 

startup by mortgaging her house, a true sign of an entrepreneur. 

From 1998 to 2003, the company ran on an extremely tight budget, whereby all operating profits were reinvested in the business to 

fund continued growth through the launching of new magazine 

brands. In 2003, the company had approximately 20 employees and 

generated approximately $4 million of sales. It was during this period that Phyllis decided in order to properly fund growth and scale 

the company both through organic growth and acquisition, that 

Hoffman Media would need to raise capital. 

Since Hoffman Media was not producing net income, it prevented 

the company from accessing traditional commercial lending from a 

bank. And after a 24-month search, interviewing private equity 

funds, Hoffman Media successfully raised $5 million from BIA Digital Partners and Frontier Capital. This capital raised allowed 

Hoffman Media to complete a strategic acquisition of a complementary business and fund additional marketing and hiring needs. 

From the period of 2004 to 2010, the company has scaled, growing revenue from approximately $10 million to $40 million, while 

also growing our employee count from 20 to 135. The capital raised 

is worth explaining further. BIA Digital Partners provided mezzanine debt with warrants to the company, which Hoffman Media 

successfully paid back in 2009. The outcome was a win for all parties involved: it was a win for Hoffman Media; it was a win for the 

private equity firm; and it was a win for the LPs. 

I want to point out that half of the fund’s LPs are banks, large 

national banks, some of the best institutions in the land. And I will 

go as far as saying that Hoffman Media would not be where we are 

today had it not been for the support of both BIA and also their 

LP support, which included banks. 

The Volcker Rule’s proposed limitation on banks being owners in 

or holding equity in hedge funds and private equity firms concerns 

me in that if it is done away with altogether or it is limited to 

roughly 3 percent of tier 1 capital, which I believe is proposed, I 

50 

fear this could lead to a substantial decrease in the funding that 

supports private equity, in particular, those covering the lower 

middle market. 

If the pie gets smaller and banks can only invest a small portion 

of their capital, my fear is that it will only reach the larger buyout 

funds and not the lower middle market. The total economics of 

those relationships with the larger buyout funds are obviously 

more important. However, the value created in larger private equity is generally done through leverage, dividending out excess 

cash, cutting costs, taking companies private, and then returning 

them to the public market later. 

Firms like Hoffman Media can obviously show that a private equity investment works. It works for us. We have grown a real sustainable business. We are now producing substantial sales tax that 

impacts the local sales levels. We generate taxable income. We 

have 135 people who are impacting our local economy every day by 

paying their mortgages, buying groceries, etc. 

My biggest concern is that if companies like Hoffman Media have 

additional hurdles that are put in place to prevent us from growing, it is going to slow down this economic recovery, I have no 

doubt. This recovery will come from small business. And it is businesses like ours. We have entrepreneurs who take risks, go after 

their dreams. And then when they scale and need that capital, if 

they can’t get it from a traditional bank, which is incredibly difficult to do—we have tried, and it took us years to finally work 

with a traditional bank—it will have big negative impact on the recovery. 

In passing, I will say health care reform and higher taxes are 

also hurdles that can potentially slow down the economy. I know 

that as we produce profits, if the cost of our profit goes up by tax 

rates or our costs of operating goes up with health care costs, that 

directly steals money off the bottom line. And one of the Congressmen earlier said that millionaires don’t produce jobs. The fact of 

the matter is if a millionaire is given another million dollars, they 

reinvest it. They don’t put it in their pocket. And we are an example of that. 

So, in closing, I believe that the story of Hoffman Media is compelling. I urge the Members of Congress to pay close attention to 

our story because there are thousands of companies just like Hoffman Media out there. We don’t want to put limitations on our 

banks. The fact of the matter is if they want to invest in smaller 

private equity firms or large buyout funds, it is their choice, but 

let’s not limit the capital that is flowing down the lower middle 

market because that is where a significant amount of jobs will be 

created. Thank you very much. 

[The prepared statement of Mr. Hoffman can be found on page 

72 of the appendix.] 

Chairman BACHUS. Mr. Maddy. 

STATEMENT OF H. CHARLES MADDY, III, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, SUMMIT FINANCIAL GROUP 

Mr. MADDY. Chairman Bachus, members of the committee, my 

name is Charlie Maddy. I am president and CEO of Summit Financial Group. My bank serves communities located in south central 

51 

and the eastern panhandle of West Virginia, as well as in the 

Shenandoah Valley and northern regions of Virginia. 

Summit Community Bank has more than a half billion dollars in 

small business loans. We contribute a quarter million dollars to our 

schools and nonprofit and community organizations annually, and 

our employees volunteer thousands of hours to support our schools, 

nonprofit organizations, and charities. We are very proud of the relationships that we have with our customers and community. They 

are our friends and neighbors, and our success is linked to their 

success. 

We now have the benefit of history, which clearly shows that 

community banks were not responsible for the great recession we 

are currently experiencing. However, banks like mine continue to 

be subjected to intense regulatory scrutiny. Calls for expensive and 

scarce capital and pressure to add compliance staff to deal with all 

the new regulations are currently plaguing us. 

How can I be out in my community helping someone improve 

their quality of life or helping a small business grow if all I do is 

deal with the aftermath of problems that I did not create? 

Let me give you a bit of perspective on this. We used to all know 

where we stood with capital rules. We could plan for growth and 

make new loans without being criticized for having too little capital. This has all changed. Banks are being asked to raise capital, 

in some cases, even if they are well managed and have no significant asset quality problems. 

Most importantly, there is no clarity on how much capital is required. It has clearly become a moving target. This uncertainty, 

combined with pressure to raise new capital, makes it hard to grow 

and seek new lending opportunities. Please keep in mind that the 

most efficient way to raise the capital ratio in one’s financial institution is to simply shrink the size of your assets, including your 

loan balances. 

Another disturbing trend is that the new standards are being applied to banks without having a clear understanding of what they 

are. Banks should at least be told what ratios examiners are using 

as standards. Moreover, what used to be guidance is now being enforced as if there were hard and fast rules. In our case, the brightline test currently being applied will reduce our ability to make 

new commercial real estate loans by over $100 million. 

The regulators in Washington seem intent on twisting the screws 

tighter and tighter. After all, regulators do not lose their jobs for 

being too tough. The time to be tough is before an economic turndown, not after. In fact, being tough makes things worse at this 

stage in the recovery. It is like adding fertilizer to your lawn in the 

heat of the summer; it is only going to kill the grass, not help it. 

Regarding the Dodd-Frank Act, it will have an enormous and 

negative impact on my bank. Already, there are over 1,000 pages 

of new proposed rules and there will be many thousands more, 

many of which will come from the Bureau of Consumer Financial 

Protection. We have already added one new full time member to 

our compliance staff and this may not be enough. These are resources that won’t help us make new loans in our communities. 

We are also bracing for the loss of revenue from interchange. The 

so-called carve-out under Dodd-Frank for community banks won’t 

52 

work. Revenue from interchange is important to my bank, as it 

helps offset some of the cost of providing checking accounts to my 

customers. We cannot afford to offer financial services if we cannot 

cover the cost of doing so. 

The people who get hurt most by these changes are the hardworking men and women in West Virginia who earn just enough 

to make ends meet. They are currently able to get most of their 

basic banking services free of charge. If we lose fees like interchange revenue, free checking and similar services are likely to disappear for everyone. I think this is bad public policy. 

Summit Community Bank will survive these changes, but many 

other community banks may not. In fact, regulators have told some 

banks that if you are under $500 billion in assets, you may want 

to consider merging, as you may be simply too small to survive. 

This would translate to over 90 percent of all banks headquartered 

in my home State of West Virginia. Higher costs, restrictions on income, limits on new sources of capital, and regulatory pressure to 

limit lending in certain sectors all make it harder to meet the 

needs of our communities. 

Madam Chairwoman, I truly appreciate the opportunity to be 

here today and I will be happy to answer any questions that you 

may have. 

[The prepared statement of Mr. Maddy can be found on page 88 

of the appendix.] 

Mrs. CAPITO. [presiding] Thank you, Mr. Maddy. And I apologize 

for not being here to formally introduce Charles Maddy. I know he 

was introduced, but he is one of my constituents and has been a 

longtime and very active banker in our State. I thank you for your 

service to our State and your community. He lives in Moorefield. 

He is also an executive of the Federal Home Loan Bank of Pittsburgh, has been active with that as well and has been a great resource for me in terms of trying to unwind all of these issues, besides inviting me to his bank to meet all the great folks who work 

in Moorefield, which I said was not really named after me, but I 

will claim the ‘‘Moore’’ part of Moorefield. So thank you, Charles. 

Mr. MADDY. Thank you. 

Mrs. CAPITO. Where we are right now is we are voting. And so 

Chairman Bachus went to vote, so we can keep the hearing going. 

He is going to come back and relieve me, and then I will have to 

slip back out again. 

So I would like to recognize our next witness, Mr. Andrew 

Bursky, who is the managing partner of Atlas Holdings LLC. Welcome. 

STATEMENT OF ANDREW M. BURSKY, MANAGING PARTNER, 

ATLAS HOLDINGS, LLC 

Mr. BURSKY. Thank you, Madam Chairwoman, and distinguished 

ladies and gentlemen of the committee. I appreciate the opportunity to address you today. I am Andrew Bursky. I started my 

first business in my hometown of Indianapolis when I was 11 years 

old. 

Today, at Atlas Holdings, I employ 5,000 individuals directly or 

through the portfolio companies of my private equity fund. These 

jobs are the result of three kinds of private equity activity. We acVerDate Nov 24 2008 17:28 Mar 22, 2011 Jkt 064550 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\64550.TXT TERRIE
53 

quire struggling businesses and rehabilitate them by investing our 

own capital and extensive managerial resources. We grow businesses whose expansion had been stunted by capital or managerial 

constraints, and on occasion we will start a business and partnership with experienced operating partners. 

Our work is quite similar to that of other small to mid-sized private equity firms, of which there are more than a thousand in the 

United States. Our collective activity has been a well documented, 

if not well publicized engine of growth for the U.S. economy for 

more than 2 decades. 

A recent study by Ernst & Young stated that 80 percent of private equity owned businesses increased employment during the period of PE ownership, even though most of these companies were 

in mature industries or had been stress companies when purchased. 

Another study for the Center for Economic Studies found that 

prior to investment private equity portfolio companies were losing 

jobs at a rate of 1 to 3 percentage points faster than their competitors. After PE investment, companies initially experienced a dip in 

employment that saw employment growth rates rise above industry 

averages within 4 years. 

Let me briefly share with you an example of our activities which 

occurred in Michigan, the State with the Nation’s second highest 

unemployment rate. In 2002, we became aware of a shuttered specialty steel mill in South Lyon, Michigan. The mill, Michigan 

Seamless Tube, had been profitable for 75 years, but had fallen 

upon hard times as a result of problems at a sister division and a 

series of management blunders. 

The banks had taken over, dismissed the workforce, and were 

planning on a full liquidation. In these settings, rarely will an industry buyer appear. What is required is a private equity investor 

with the experience to work through a complicated bankruptcy and 

the operational skills to shepherd the business through the process. 

Working closely with the U.S. steelworkers in the State of Michigan, we crafted a plan to restart the facility. We committed $10 

million of our own capital, enormous time, and 18 months of sleepless nights. By 2004, the business was operating profitably and 

today MST employs 250 in high-paying manufacturing jobs in a 

State where every job counts. As an aside, MST ships about 20 percent of its production into highly competitive export markets, demonstrating that well positioned U.S. manufacturers can in fact compete globally. 

In 2010, two of our three transactions were similar to Michigan 

Seamless, our acquisitions of Bridgewell Resources, a Portland Oregon-based global trading company that was being liquidated 

through a Federal receivership, and Detroit Renewable Power, a 

shuttered green energy from waste business in downtown Detroit. 

All that kept these businesses from final liquidation was our willingness to invest our time and money, work cooperatively with affected parties to seek resolution to seemingly intractable problems, 

and bet on our conviction that we could undertake these challenges 

profitably. These two acquisitions in 2010 have already put more 

than 350 people back to work. 

54 

Occasionally, we hear of a PE-owned overleveraged business failing or being forced to reduce employment, just as businesses not 

owned by private equity firms sometimes fail. But the work of the 

many small to mid-sized PE firms like mine is focused on saving 

and growing businesses. 

It is worth noting that a study by the private Equity Growth 

Council credits private equity with preserving 185,000 jobs since 

January of 2008 through investments in 137 bankrupt businesses, 

to say nothing for the hundreds of thousands of new jobs created 

by providing capital to growing businesses. 

Unfortunately, this engine of economic growth is about to have 

its wings clipped as an unintended consequence of Dodd-Frank. 

Harvey Pitt, former SEC Chairman, stated just last Thursday that, 

‘‘My own belief is that private equity firms are the engine of economic growth and we are now imposing restrictions on them simply 

for the sake of restrictions.’’ 

Shame on all of us, business people, financiers, and legislators if 

we fail to learn the lessons of Madoff and the financial crisis. So 

I applaud your efforts to create balanced legislation that addresses 

real problems of the past. But one important lesson of the financial 

meltdown is that private equity did not contribute to systemic risk. 

No investors were harmed, nor was there any lack of transparency 

or fraud perpetrated on investors by any private equity fund. 

We have asked the SEC to delay implementation of the DoddFrank requirements on PE firms until the issues involved are 

thoughtfully reassessed. No public purpose is served by implementation but the costs are very real. We will spend hundreds of thousands of dollars and, far more damaging, we will reallocate our resources to registration, regulatory, and compliance matters and 

away from our highly productive focus, which has consistently created jobs for America. 

Thank you very much. 

[The prepared statement of Mr. Bursky can be found on page 65 

of the appendix.] 

Mrs. CAPITO. Thank you. 

Next, we have Mr. Ken Brody of Taconic Capital, and where are 

you located, Mr. Brody? 

Mr. BRODY. New York City. 

Mrs. CAPITO. New York City. Thank you. 

STATEMENT OF KENNETH D. BRODY, PARTNER, TACONIC 

CAPITAL 

Mr. BRODY. The last time I appeared before this committee was 

about 3 years ago when I was a lone ranger among a whole slew 

of hedge funds calling for mandatory regulation by the SEC of all 

hedge funds. 

Mrs. CAPITO. Mr. Brody, I’m sorry. I hate to do this but since I 

am the only one left, and we have a vote going, could I ask you 

to suspend and we will be right back? 

Mr. BRODY. In mid-sentence, I will. We will see you when you 

come back. 

Mrs. CAPITO. The committee will stand in recess. 

[recess] 

55 

Chairman BACHUS. You started your statement, you may resume. 

Mr. BRODY. This is better. Here we go. 

As I started out before, the last time I appeared before this committee was 3 years ago when I was the lone ranger among a slew 

of hedge funds that were asking for some upgraded regulation of 

hedge funds, and specifically asking for you all to make mandatory 

hedge funds registering with the SEC and then the SEC getting 

better with their oversight at what they do. So it is good to be back 

here again, on a different topic. I have a few comments. They will 

all be focused on Dodd-Frank, but I am open to any questions that 

you might have of me. 

Dodd-Frank is obviously not perfect legislation. It has flaws, but 

it is a step in the right direction. It is but a part of international 

regulation of the financial system, particularly Basel III, that is 

aimed at creating more equity in the financial system. The goal is 

to have safer and duller banks. And, so far so good, we are heading 

in that direction. 

In the United States, lending has picked up and most borrowers, 

not all, but most borrowers are getting the money that they need. 

To the extent that banks are still cautious in their lending, it is 

more a function of their recent history and current economic uncertainty than Dodd-Frank. 

Where certain companies can’t borrow, particularly those seeking 

loans based on cash flows, help is on the way. Our free market 

economy works well, and there are a number of firms looking to 

plug that hole because they can make money by doing so. So I am 

not very concerned about the effects that Dodd-Frank is having on 

the lending market in the near term. 

Of course, the bureaucracy involved in writing the rules and 

overseeing the rules for Dodd-Frank creates uncertainty, but the 

uncertainty involved with the writing of the rules will pass and we 

will end up with a sounder financial system. We should not look 

to go back to where we are. It was too loose, too liberal, and helped 

us land in disaster. So that is not the right standard to say, geez, 

we used to do that and now we can’t do that anymore. We do need 

a safer banking system, and we are well on the way to creating it. 

Thank you. 

[The prepared statement of Mr. Brody can be found on page 64 

of the appendix.] 

Chairman BACHUS. Do you have any questions, Mr. Green? 

Mr. GREEN. I will be very brief if you are going to pass, Mr. 

Chairman. You are going to pass? 

Chairman BACHUS. I will let you go. 

Mr. GREEN. Okay, thank you very much. And I thank the witnesses for testifying today. As you know, we have votes and I did 

miss some of your testimony, but you did submit your testimony for 

the record. 

Let me start by asking a very basic question. What happens to 

a business that attempts to serve a clientele that doesn’t exist or 

tries to cater to a demand that doesn’t exist? 

Mr. Hoffman, would you quickly tell me what happens to such 

a business? If you try to serve a demand that there is no demand 

for the product, what happens to the business? 

56 

Mr. HOFFMAN. I think that you know there is R&D that companies do to sort of figure that out. 

Mr. GREEN. Let me just say this to you, Mr. Hoffman, to help you 

along. It goes out of business. You can’t cater to a clientele that 

doesn’t exist and stay in business. Businesses stay in business because they have a demand that they satisfy. And my point that I 

was making earlier that I appreciate your addressing had to do 

with the fact that businesses are not going to invest when there is 

not a demand or at least the potential demand for them to meet. 

Innovation is a great thing. When companies innovate, they do so 

in anticipation of a demand that will be there. Demand drives 

these things. You don’t just do it because you have money to invest, 

good business people don’t. 

Moving to my next point. 

Mr. HOFFMAN. Can I respond to that? 

Mr. GREEN. Excuse me, sir, I control the time. 

Mr. Brody, is that correct? 

Mr. BRODY. Yes. 

Mr. GREEN. Mr. Brody, I want to thank you for your comments 

because I think that Dodd-Frank has served a meaningful purpose 

as well. I am of the opinion that ‘‘too-big-to-fail,’’ nobody wanted it, 

but we did have to have a means by which we could wind down 

these huge institutions that were creating systemic failure. DoddFrank addressed the question of systemic failure. Is it perfect? My 

suspicion is, it is not, but we have at least made an attempt to 

move in a positive direction with Dodd-Frank. Just as we wind 

down banks when they have problems, we go in on a Friday, shut 

them down and open them up on Monday, the FDIC has a means 

by which this can be done. This is another means by which we take 

on large institutions that can create systemic failure. So I think 

that there is a lot of merit to Dodd-Frank. 

The Volcker Rule quickly, before I left, there was an indication 

that someone was disenchanted with the Paul Volcker Rule. The 

Rule keeps banks from using taxpayer money in proprietary trading. Am I incorrect on that; anybody want to differ? Okay. 

Is there anything wrong with being concerned about how taxpayers may have to bail out institutions that engage in proprietary 

trading with taxpayer dollars and moving to some means by which 

we try to protect taxpayer dollars? What would we do if we had no 

such rule and a large institution overextends itself and is about to 

fail? Mr. Hoffman, what should we do? 

Mr. HOFFMAN. First of all, there is a big difference in—and you 

have a difference between proprietary trading and also private equity investing. Those are two unique differences and— 

Mr. GREEN. I understand the difference between private equity 

investing, but do you not believe that we should in some way protect taxpayers who end up bailing out these companies? 

Mr. HOFFMAN. I think that private companies or corporations 

that are using their own capital to invest on their own account, 

they use it for more than just getting risky return rates, they do 

it for business development, they do it to allow companies like 

Hoffman Media and thousands of examples like ours. It gives us 

a chance to prove creditworthiness. So these alternative investments help them gauge how they build their business downstream. 

57 

Mr. GREEN. I understand. 

Mr. HOFFMAN. Explain to me taxpayer dollars. 

Mr. GREEN. Excuse me if I may, sir, since I have the questioning 

time. Thank you. Should banks invest in private equity funds? 

Mr. HOFFMAN. Absolutely. 

Mr. GREEN. Should there be any limit on how much they can invest? And when they fail, what should happen, if that happens? 

Mr. HOFFMAN. The bank should go under. 

Mr. GREEN. And if the bank goes under and that failure is systemic and it impacts the entire economy, what should happen? The 

economy should go under? 

Mr. HOFFMAN. Is that what you believe? 

Mr. GREEN. I am asking you. 

Mr. HOFFMAN. I believe the bank should go under. 

Mr. GREEN. Okay, the bank goes under, banks go under. The entire economy is impacted. 

Mr. HOFFMAN. Right. 

Mr. GREEN. It is your opinion that is just the risk the economy 

takes by letting this do this? 

Mr. HOFFMAN. Correct. 

Mr. GREEN. Okay. Thank you. My time is up. 

Chairman BACHUS. Thank you. 

Mr. Maddy, you are a community banker and you kind of have 

a unique view of ‘‘too-big-to-fail’’ because probably one out of every 

thousand businesses is deemed ‘‘too-small-to-save’’ when you have 

‘‘too-big-to-fail.’’ How does that strike you as a banker of a smaller 

institution? Do you think there is any fairness in the ‘‘too-big-tofail’’ doctrine? 

Mr. MADDY. As a small banker, and I speak for myself here of 

course, not the industry, I do think that we should have limits in 

place that keep institutions from being so large that they create 

risks that endanger our entire economy. I don’t think that is sound 

policy, and I think it should be dealt with. And I think that we can 

do that, we can keep these institutions from being so large, and 

then we can allow them to invest in some of these private equity 

situations. Then, if they do go under, the whole process works, because it is true capitalism, and that is my opinion. 

Chairman BACHUS. I think it would be true capitalism. If you are 

‘‘too-big-to-fail,’’ you are ‘‘too-big-to-exist.’’ 

Mr. MADDY. Right. 

Chairman BACHUS. And I think actually Mr. Volcker and many 

of us in Congress say if our only choice is we either bail them out 

or they will bring down the economy if we don’t bail them out, then 

they are just too big. The new report by the overseer of the TARP 

has said that Dodd-Frank actually institutionalizes ‘‘too-big-to-fail.’’ 

So you have these institutions that are just—‘‘you can’t let me fail, 

I am too big, I’ll bring down the economy.’’ I think our choices are, 

are we going to bail them out or we are not going to allow them 

to exist in that form. 

I heard your testimony and had read part of it and it is the same 

conversation I have had with small banks and even regional banks 

all over the country, before Dodd-Frank, even before that, they 

were micromanaging your loans and second-guessing your loan decisions. Do you believe that you are best able to make decisions on 

58 

who to loan money to and under what terms or that a bank examiner or a regulator in Washington is best able to do that? 

Mr. MADDY. Clearly, I think that the community bankers are in 

the best position to make those decisions. I would even go a step 

further and point out, at least in my own experience, the examiners 

who have come onsite, the people who know the area and who have 

worked in those areas for years actually have been pretty reasonable throughout this entire process. Most of the stringent and overzealous actions have come from somewhere above. We don’t know 

exactly where, but it is certainly somewhere outside of their hands, 

and in candid conversations to the degree they feel comfortable 

even admit that, that in some cases they don’t really agree with 

this but this is just how it is. 

Chairman BACHUS. I heard Paul Ryan use the same term I used 

last week when I was appearing before the—I was on a panel with 

Sheila Bair and Ben Bernanke—and that is ‘‘American 

exceptionalism.’’ We in America—the whole country was founded 

on the premise that we all have the freedom to succeed or fail and 

we don’t look to the government to direct that or to pick winners 

or losers or to be there as a safety valve for a ‘‘too-big-to-fail’’ company, that really the people are entrusted with the ability to make 

choices. And then they should live with those choices. 

If you are talking about the FDIC and insurance, deposit insurance, obviously if your underwriting standards as a whole bring 

risk to that, that is one thing. This idea, and I have talked to a 

community banker in Alabama, who a regulator, examiner, and he 

was new, had been on the job about a year, looked at an $8,000 

car loan to an 82-year old woman whose son owned the biggest 

business in the county and said the car is not worth $8,000 and 

made him write it down to $6,000. Even though the loan was current, she owned her own house, and as the banker—and this is relationship banking. I think that examiners and regulators ought to 

appreciate those relationships and they should not violate those relationships. And when he said to this family—I have dealt with 

this lady for 30 years, her son is a customer of the bank, he is good 

for it, an examiner ought to trust the business, they ought to trust 

that you are in business to make a profit, not to go broke. I think 

what they are doing, I hear this, that they were too lax in the good 

times and you mentioned and now they want to kind of make it 

up. 

Mr. MADDY. Right. 

Chairman BACHUS. The time to be tough, I think in your testimony, is before when there is—you were doing something before an 

economic turndown, and I think that is going to be one of our challenges, but I am not sure that we can all of a sudden start—you 

can’t have capitalism without capital. And whether you reserve it 

under Dodd-Frank to telling end-users or derivatives, none of 

which still haven’t seen a case where it caused any harm to our 

financial system or to those industries, by end-users like a Southwest Airlines or a John Deere hedging gasoline or fuel or currency. 

We have never seen an incident where they did anything that 

caused the financial system any concern or even that wasn’t profitable to them, yet under this new bill, they have to reserve capital 

for that. They will be going into job creation. I will say there is a 

59 

bipartisan consensus building that we need to change that. I have 

said before there are good things about Dodd-Frank, there are bad 

things and there are ugly things, and that is one of the ugly things. 

Mr. GREEN. Would the Chair yield for just 30 seconds, if I may? 

Chairman BACHUS. I will. You have 21⁄2 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I concur with you that 

there is a consensus building that we can tweak and we can mend 

the bill. I don’t think that it is perfect. I do want to just make note 

of this. In a free market economy, it is very difficult to limit the 

size of private enterprise when the businesses are desiring to grow. 

I don’t know how we in a free market economy will decide you are 

only as big as you can get now and if you get any larger we are 

going to find a way to downsize you. This is why you have to have 

some means by which you can deal with those, just as a matter of 

fact, who are so large that they can create systemic failure. There 

is no desire to have ‘‘too-big-to-fail.’’ I don’t think any business is 

‘‘too-big-to-fail.’’ That is why we want to have a means by which 

they can wind down when they get in a position that they are 

about to fail. We don’t want them to bring the economy down, and 

let’s let them pay for their own failure. That is what Dodd-Frank 

proposes do, to put them in a position where they have to cover 

their own failure. 

And I am with the chairman, all businesses count. Small banks 

didn’t create the crisis and we ought not have them pay a price 

that is unacceptable given that they were not a part of the problem. I stand with community bankers, but we also have to understand as a reality we had these huge conglomerates that were so 

large that they were impacting the entire economy. What do you 

do with them? That is what we—and we have tried to do something 

with them. And Mr. Chairman, thank you. You have been very 

generous with the time. 

Chairman BACHUS. Actually, we have additional time, and we 

have a little time on the Floor. So if you want to ask an additional 

question, I think I will follow up. 

Mr. GREEN. I will go to Mr. Brody and I am going to ask that 

we make those names a little bit larger just for those of us who 

are still trying to read without our glasses. I think it is Brody, I 

can’t quite see it. 

Mr. Brody, would you do this, in the absence of the mechanics 

in Dodd-Frank, what will we do in the future when we have these 

huge companies that may create systemic failure? 

Mr. BRODY. The first thing that we do is what we are starting 

to do. First of all, it is the financial system that is the key to systemic failure. Most other companies can fail and don’t have the 

interrelationships that causes systemic problems. 

With the big financial companies, the thing that you all are doing 

with Dodd-Frank and which Basel III will do is it is making these 

banks safer, basically safer and duller, by having them have more 

equity and engage in fewer volatile operations. So that is a big 

part, is to make it much more difficult for them to fail, and that 

is the direction that we are headed in and that is a good thing. 

That has other consequences but the world is about a tradeoff, and 

that is probably the key thing to look at going forward. 

60 

With respect to—in spite of everything, what happens if there is 

a big systemic failure, you need to have a system in place which 

allows for a gentle, not-disturbing-the-rest-of-the-world system that 

can help unwind it. One of the things you can do short of 

unwinding it is to attack the capital issues by having various forms 

of debt take hits, to basically have the institution save itself by 

being able to increase its equity by moving debt into equity, and 

there are bunches of efforts on that score going on around the 

world and that will probably end up being a big solution to the 

problem. 

Chairman BACHUS. Thank you. Let me follow up with one question to our community bank representative. Interchange fees, how 

will that affect your bottom line and that of most community 

banks? 

Mr. MADDY. I think as a practical matter, when all is said and 

done, and I guess that is my biggest point, we can’t allow it to affect our bottom line. We will have to make up for those fees in 

some other way, but it costs hundreds of thousands of dollars to 

offer free checking, free Internet banking, free debit cards, free 

services to so many of the folks out there who are balancing their 

checkbooks accurately and taking care of things and not incurring 

any fees whatsoever. And one of the ways we do that, frankly, is 

from the fees that we collect on some of these other products. And 

so what will happen is there will simply be a transfer of those fees. 

Either the lenders—the borrowers will have to pay for it, other deposit services will end up making it up. In the end, somebody is 

going to have to pay the price because we have to continue to have 

a profit that makes it worthwhile for investors to want to buy our 

stock. 

Chairman BACHUS. All right. Thank you. 

I appreciate the testimony, and I do think one thing that we 

highlighted here is that private equity companies and hedge funds 

as well as community banks can be part of the solution and that 

none of them I think were part of the problem. They didn’t create 

a problem, they created jobs and they have sustained jobs, and we 

should be very careful in the level of regulation. 

Thank you very much for your testimony. 

The Chair notes that some members may have additional questions for this panel that they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for 

members to submit written questions to these witnesses and to 

place their responses in the record. 

Also, we have an unanimous consent request to enter into the 

record letters from the National Association of Federal Credit 

Unions and the Manufactured Housing Association for Regulatory 

Reform. Without objection, that is so ordered, and this hearing is 

adjourned, thank you. 

[Whereupon, at 2:00 p.m., the hearing was adjourned.] 

(61) 

A P P E N D I X 

January 26, 2011 

62 


64550.001
63 


64550.002
64 


64550.003
65 


64550.004
66 


64550.005
67 


64550.006
68 


64550.007
69 


64550.008
70 


64550.009
71 


64550.010
72 


64550.011
73 


64550.012
74 


64550.013
75 


64550.014
76 


64550.015
77 


64550.016
78 


64550.017
79 


64550.018
80 


64550.019
81 


64550.020
82 


64550.021
83 


64550.022
84 


64550.023
85 


64550.024
86 


64550.025
87 


64550.026
88 


64550.027
89 


64550.028
90 


64550.029
91 


64550.030
92 


64550.031
93 


64550.032
94 


64550.033
95 


64550.034
96 


64550.035
97 


64550.036
98 


64550.037
99 


64550.038
100 


64550.039
101 


64550.040
102 


64550.041
103 


64550.042
104 


64550.043
105 


64550.044
106 


64550.045
107 


64550.046
108 


64550.047
109 


64550.048
110 


64550.049
111 


64550.050
112 


64550.051
113 


64550.052
114 


64550.053
115 


64550.054
116 


64550.055
117 


64550.056
118 


64550.057
119 


64550.058
120 


64550.059
121 


64550.060
122 


64550.061
123 


64550.062
124 


64550.063
125 


64550.064
126 


64550.065
127 


64550.066
128 


64550.067
129 


64550.068
130 


64550.069
131 


64550.070
132 


64550.071
133 


64550.072
134 


64550.073
135 


64550.074
136 


64550.075
137 


64550.076
138 


64550.077
139 


64550.078
140 


64550.079
141 


64550.080
142 


64550.081
143 


64550.082
144 


64550.083
145 


64550.084
146 


64550.085
147 


64550.086
148 


64550.087
149 


64550.088
150 


64550.089