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INTERNATIONAL IMPACTS OF THE 

FEDERAL RESERVE’S QUANTITATIVE 

EASING PROGRAM 

HEARING 

BEFORE THE

SUBCOMMITTEE ON MONETARY 

POLICY AND TRADE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

JANUARY 9, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–57 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON MONETARY POLICY AND TRADE

JOHN CAMPBELL, California, Chairman 

BILL HUIZENGA, Michigan, Vice Chairman 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. GRIMM, New York 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

ROBERT PITTENGER, North Carolina 

TOM COTTON, Arkansas 

WM. LACY CLAY, Missouri, Ranking 

Member 

GWEN MOORE, Wisconsin 

GARY C. PETERS, Michigan 

ED PERLMUTTER, Colorado 

BILL FOSTER, Illinois 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

January 9, 2014 ................................................................................................ 1 

Appendix: 

January 9, 2014 ................................................................................................ 39 

WITNESSES 

THURSDAY, JANUARY 9, 2014 

Lachman, Desmond, Resident Fellow, the American Enterprise Institute ........ 7 

Meltzer, Allan H., the Allan H. Meltzer Professor of Political Economy, 

Tepper School of Business, Carnegie Mellon University .................................. 6 

Steil, Benn, Senior Fellow and Director of International Economics, the Council on Foreign Relations ....................................................................................... 3 

Subramanian, Arvind, Dennis Weatherstone Senior Fellow, the Peterson Institute for International Economics, and Senior Fellow, the Center for Global Development ..................................................................................................... 9 

APPENDIX 

Prepared statements: 

Waters, Hon. Maxine ........................................................................................ 40 

Lachman, Desmond .......................................................................................... 42 

Meltzer, Allan H. .............................................................................................. 53 

Steil, Benn ......................................................................................................... 55 

Subramanian, Arvind ....................................................................................... 61 

(1) 

INTERNATIONAL IMPACTS OF THE 

FEDERAL RESERVE’S QUANTITATIVE 

EASING PROGRAM 

Thursday, January 9, 2014 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON MONETARY

POLICY AND TRADE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

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

2128, Rayburn House Office Building, Hon. John Campbell [chairman of the subcommittee] presiding. 

Members present: Representatives Campbell, Huizenga, Pearce, 

Posey, Grimm, Fincher, Stutzman, Mulvaney, Pittenger, Cotton; 

Clay, Peters, Foster, Carney, and Kildee. 

Ex officio present: Representatives Hensarling and Waters. 

Chairman CAMPBELL. The Subcommittee on Monetary Policy and 

Trade will come to order. 

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

the subcommittee at any time. 

The Chair now recognizes himself for 5 minutes for the purpose 

of an opening statement. I won’t use all 5 minutes, but I will simply open to say this is a continuing part of our series of hearings 

examining the Federal Reserve (Fed) at the 100th anniversary of 

the Federal Reserve, and examining both the history of the Fed 

and the current activities of the Fed and what the future of the Fed 

might look like. 

The title of this hearing is, ‘‘International Impacts of the Federal 

Reserve’s Quantitative Easing Program.’’ QE, as we have lovingly 

come to know it, has been the subject of a number of hearings or 

discussions in hearings in this committee since it was begun several years ago. 

My opinion on QE in terms of its domestic policy has been clear. 

There are benefits, if you will, to QE, and there are clearly risks 

and negatives to QE. And in my estimation, the risks and negatives of QE are currently outweighing the benefits thereof, which 

calls for it being wound down and eliminated, in my view. Clearly, 

the Federal Reserve Board Open Market Committee has not agreed 

with that assessment in the past, and we will see what they do in 

the future. 

But a lot of those discussions have been based upon an evaluation of the domestic impacts of quantitative easing, of what it is 

doing for the economy, for interest rates, for the money supply, for 

2 

those sorts of things. That is not what this hearing is intended to 

examine. 

U.S. monetary policy does not happen or exist in a vacuum. 

When the greatest nation on earth makes decisions and makes economic moves or moves in the area of monetary policy, other nations 

react, and it affects the international markets and it affects international trade and can affect a number of things. 

And we have our distinguished panel here this morning to give 

us their views of what are the international impacts of quantitative 

easing, and how do the actions or reactions of what is going on in 

other countries impact the United States? It is another part of 

quantitative easing that we haven’t spent a lot of time on, and that 

this hearing is intended to try and understand better, as to what 

those international impacts are that thereby have an impact upon 

the United States domestically, as well. 

So, with that, I believe—okay. The gentleman is recognized for 

5 minutes for an opening statement. 

Mr. KILDEE. Thank you, Mr. Chairman. I don’t have any formal 

opening statement. I just want to thank the witnesses for their 

presence. 

Obviously, this is a really important issue. Mr. Peters and I both 

represent the State of Michigan, so we are particularly interested 

in your observations relative to this policy and its effect on unemployment. 

But I appreciate your attendance. Thank you. 

I yield back. Thank you. 

Chairman CAMPBELL. The gentleman yields back. 

The other gentleman from Michigan. I just realized I am completely— 

Mr. HUIZENGA. Mr. Chairman, you get— 

Chairman CAMPBELL. —surrounded by Michiganders here. 

Mr. HUIZENGA. —three of us up here. 

Chairman CAMPBELL. Okay. The other gentleman from Michigan 

is recognized for 5 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. And for the record, I 

believe that the Federal Reserve Open Market Committee ought to 

have listened to you more often, as well. So, just to get that out 

of the way. 

But, it is interesting, in its 100th year, going back and doing 

some research—I love history. I love doing some reading on that. 

And, obviously, you look at the creation of the Fed and why this 

came about, some of those economic crises in the early 20th Century. Having the Fed founded as an independent agency, deriving 

its power from Congress, we have seen a certain amount of expansion over the past 100 years, and that has been quite significant 

expansion. And looking at that as it was originally created to supervise and monitor banking systems here in the United States, it 

seemed to grow unchecked. I know that nature and government 

abhor vacuums, and they will fill them, one way or the other. 

But we are seeing them being really a lender of last resort for 

banking institutions that require additional credit to stay afloat, 

and, obviously, that has an impact on what is happening internationally. But given the interconnectedness of the global financial 

system, there is no doubt that their policies have significantly imVerDate Nov 24 2008 12:31 Aug 26, 2014 Jkt 088519 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\88519.TXT TERRI
3 

pacted international markets and foreign economies. And with the 

implementation of artificial near-zero interest rates with QE1, -2, 

-3, Operation Twist, the Fed has made an attempt to stimulate the 

domestic economy by using an unprecedented level of interventionist policies. 

I am curious to get your input as to what you believe that this 

experiment has caused, as we have seen investors really make different decisions. I saw a statistic this morning that the top 1 percent has seen a, I believe it was a 31 percent increase in their 

wealth over the last few years, and for the lower tiers of the economy, it has been fractions of a percent. 

And I think the key to all of this, the income questions that we 

are dealing with, distribution and equality and equality of opportunity; it is really about economic activity more than anything. So 

I think we have a common goal. The question is, how is it really 

being handled? 

These emerging-market economies have caused several foreign 

currencies to rise in value. However, rumors—it was interesting 

just seeing the rumors in mid-2013 that the Federal Reserve would 

begin tapering its purchases of government securities earlier than 

expected. Investors began to react very quickly. They are not static; 

they are very dynamic when they are making those decisions. They 

are selling off their stakes in foreign currencies across the globe. 

So, we obviously have an impact. 

What we learn today shouldn’t only inform our understanding of 

what is happening here domestically, but, increasingly, our global 

and complex macroeconomy that we have here. And I appreciate 

your time today, gentlemen, giving us some insight on your take 

as to what has been happening, as we see this 100th-anniversary 

milestone. 

With that, Mr. Chairman, I yield back. Thank you. 

Chairman CAMPBELL. The gentleman yields back. 

Again, thank you all for being here. 

We will now hear from the people who know more about this 

than all of us put together. 

And we will start with Dr. Benn Steil, who is a senior fellow and 

director of international economics at the Council on Foreign Relations. He previously served as the non-executive director of the 

virt-x security exchange, which is now part of the Swiss Exchange, 

and formerly directed the International Economics Programme at 

the Royal Institute of International Affairs in London. 

Dr. Steil, welcome. Thank you. And you are recognized for 5 minutes. 

STATEMENT OF BENN STEIL, SENIOR FELLOW AND DIRECTOR 

OF INTERNATIONAL ECONOMICS, THE COUNCIL ON FOREIGN RELATIONS 

Mr. STEIL. Thank you, Mr. Chairman. 

Since the financial crisis in 2008, actions taken by the Federal 

Reserve to increase liquidity in the U.S. financial system have had 

a major impact outside the borders of the United States. Quantitative easing, through which the Fed increases the monetary base 

by buying longer-term financial assets with newly conjured dollars, 

thereby pushing down their yield, was undertaken partly to encourVerDate Nov 24 2008 12:31 Aug 26, 2014 Jkt 088519 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\88519.TXT TERRI
4 

age, and indeed has encouraged, investors to shift resources into 

riskier assets. 

Though wholly unintended by the Fed, however, this shift has 

encompassed securities issued in emerging-market countries. Anticipation of the Fed’s withdrawal from QE3, though it will only 

begin with a modest tapering of monthly asset purchases this 

month, has already had a substantial impact on the currency and 

bond markets of a number of important emerging-market economies. 

The hardest-hit countries have been those running large current 

account deficits—in particular, India, Indonesia, Turkey, and 

Brazil. Economic growth in these countries and the investment returns coming with it, reliant as they have been on short-term capital flows from abroad, have always been the most at risk of a 

change in the trajectory of Fed policy from accommodation to tightening. 

So how can emerging markets protect themselves in advance of 

a tightening of Fed policy? A recent IMF study found that countries 

with a lower share of foreign ownership of domestic assets, a trade 

surplus, and large foreign exchange reserves have been more resilient. This has policy implications. In good times, developing countries should apply a firm hand to keep their imports and currency 

down and their exports and dollar reserves up. 

Unfortunately, such policies are apt to constitute what many observers in this country would call ‘‘currency manipulation.’’ Economists Jared Bernstein and Dean Baker recently called for the 

United States to impose taxes on foreign holdings of Treasuries 

and tariffs on imports precisely to counteract them. This is, in my 

view, a misguided recipe for raising global trade tensions and political conflict. But the very fact that prominent commentators are 

calling for such action illustrates the importance of considering how 

the functioning or malfunctioning of the global monetary system 

can encourage a spiral of damaging policy actions. 

China’s agreements with Brazil, Russia, Turkey, and Japan to 

move away from dollar-based trade, for example, have the potential 

to undermine the multilateral trading system, as countries that 

don’t want to stockpile each other’s currency will use trade discrimination to prevent trade imbalances emerging. 

So what can be done? International central bank cooperation can 

help at the margins by mitigating short-term liquidity problems, 

most notably through currency swap arrangements. The Fed extended swap lines to Brazil, Mexico, and South Korea in October 

of 2008, although these arrangements were allowed to expire in 

2010. 

Regarding Federal Reserve monetary policy actions, anything 

that makes them more predictable will, all else being equal, attenuate market volatility globally. Over the past 15 months, the 

Fed has tried to do this through the formal use of so-called forward 

guidance. Initially, this was implemented through the setting of 

date-based markers for the raising of interest rate targets. These 

were quickly abandoned, however, in favor of data-based markers 

for both the raising of interest rate targets and the tapering of 

monthly asset purchases. 

5 

Both approaches are challenging to carry out in practice. Datebased guidance is problematic in that date markers are ultimately 

justified by the Fed’s expectations of economic conditions years into 

the future. And, as I have documented elsewhere, the Fed’s forecasting record over the past quarter-century has been poor. Databased guidance can also create, rather than reduce, market turbulence when the data markers themselves are volatile, such as 

monthly employment figures. Asset purchases, in particular, are 

not a precision tool, so trying to calibrate them continuously to 

volatile economic data is fraught with difficulties. 

It is worth recalling that Chairman Bernanke had in June suggested that asset purchases would end with the unemployment rate 

at around 7 percent. In fact, tapering is only now just starting with 

unemployment at this level. Assuming the Fed had good reason to 

abandon the Chairman’s June guidance, it would have been advisable not to issue it in the first place. 

In short, rules, targets, and forward guidance for U.S. monetary 

policy action will not significantly mitigate the challenges that 

emerging markets will face going forward in adapting to market 

perturbations triggered by such action or inaction. Broadly speaking, the inevitable inconsistency that will open up between the 

Fed’s rules, targets, and guidance on the one hand, and unexpected 

economic developments on the other, will lead either to inappropriate policy stances or a falling away of the credibility of such 

rules, targets, and guidance as they are abandoned or amended. 

It is therefore in our national interest to accept openly that 

emerging-market governments be able to implement prudent controls on short-term portfolio inflows in order to shield their economies from sudden, extreme, and unpredictable shocks, some of 

which may be triggered by the decisions of our own Federal Reserve, taken in good faith pursuant to the mandates assigned to it 

by Congress. 

Chile, which has been a model of prudent macroeconomic management over many years, used modest 1-year unremunerated reserve requirements on capital inflows with some apparent success 

during the crisis-marked 1990s. As major serial foreign financial 

crises over the past 4 decades have illustrated, we here in the 

United States also bear real costs when overexposed and underprotected banks and governments find themselves, in the face of rapid 

and large-scale shifts in the flows of capital internationally, quite 

suddenly unable to pay their bills. 

I thank you again for the opportunity to participate in these important discussions. 

[The prepared statement of Dr. Steil can be found on page 55 of 

the appendix.] 

Chairman CAMPBELL. Thank you very much, Dr. Steil. 

Dr. Allan Meltzer is professor of political economy at Carnegie 

Mellon University. Dr. Meltzer chaired the International Financial 

Institution Advisory Commission, also known as the Meltzer Commission, and was a founding member of the Shadow Open Market 

Committee. Dr. Meltzer served on the President’s Economic Policy 

Advisory Board and the Council of Economic Advisors. 

6 

And, of course, Dr. Meltzer’s main claim to fame is that he has 

a degree from the same university from which I graduated, UCLA. 

He has a doctorate, I had a B.A.—an insignificant difference. 

But thank you so much for being here, Dr. Meltzer. And you are 

recognized for 5 minutes. 

STATEMENT OF ALLAN H. MELTZER, THE ALLAN H. MELTZER 

PROFESSOR OF POLITICAL ECONOMY, TEPPER SCHOOL OF 

BUSINESS, CARNEGIE MELLON UNIVERSITY 

Mr. MELTZER. Chairman Campbell, thank you. It is always a 

pleasure to be here, and I thank you and the members of the committee for inviting me. 

I am going to talk about what I think gets lost almost all the 

time in these discussions. That is, how do we get the world back 

to long-term stability? That is really what the major objective 

should be: to find a way, a path that will take us back to long-term 

stability. 

Central banks have two major monetary responsibilities: domestic and; international. Most central banks ignore the international 

responsibility and achieve domestic price stability, if they do it at 

all, by acting unilaterally. Having made that choice, international 

stability, enhanced stability of exchange rates and capital movements requires some form of collective agreement. 

I have long advocated a program that both achieves domestic stability and increases exchange rate stability. My proposal does not 

require international conferences, foreign intervention in domestic 

policy, or enforcement by international supervisors. It is entirely 

voluntary and is enforced by markets, much as the international 

gold standard was enforced by markets. 

It has a few simple rules. 

First, the United States, the European Central Bank, the Bank 

of Japan, and if China ends its exchange controls, the Bank of 

China, agree to maintain domestic inflation between 0 and 2 percent a year. 

Second, any other country that chooses to import low inflation 

and maintain a fixed exchange rate can peg at its own choice to 

one or a basket of the major currencies. They gain a benefit, price 

and exchange rate stability, that no country can achieve acting 

alone. The country that chooses this policy is responsible for maintaining its exchange rate. 

Third, the major countries benefit by gaining exchange rate stability with all countries that peg to one or more of their currencies. 

The major currencies float to permit changes in productivity and 

possibly taste. 

Fourth, no country is required to join the system. It remains voluntary. The public good that the system provides gives an incentive 

to join. 

Fifth, the system would introduce discipline that has been lacking since the breakdown of the Bretton Woods system. Like the old 

international gold standard, markets would do the enforcement. If 

a country ran large budget deficits, markets would devalue the currency and increase expected inflation, forcing the country to adjust. 

Sixth, countries could suspend operation of the system, as they 

did under the gold standard. Not permitting temporary suspension 

7 

is a major flaw in the European monetary arrangements that prolongs, indeed forever perhaps, crisis. 

I do not claim this proposal would achieve some ideal result. I 

do not believe that is possible for modern democratic governments. 

It offers improvement of increased stability. An ideal, like zero instability, is not achievable in an uncertain world. If adopted, my 

proposal would limit the damage that governments do, particularly 

the damage that the Federal Reserve System does. 

A current example is the excessive expansion of bank reserves 

that spill over to other countries. Some, like Japan, respond by depreciating their currency. Others experience an unwanted inflation. 

Still others, Turkey for example, have difficulty adjusting. 

The number of problems that have occurred is small so far because the amount of reserves that the Fed has produced are almost 

entirely idle reserves. More than 95 percent of QE2 and QE3 have 

the first round of expansion and then are idle and held by the 

banks. 

It is a question to which I do not find a sensible answer if you 

ask, with $2.5 trillion sitting idle on banks’ balance sheets, and $2 

trillion sitting idle on corporate balance sheets, what in the name 

of goodness can the Federal Reserve do that the banks and the corporations can’t do by themselves? 

I make two additional—governments do not limit damage or prevent it—proposals. First, I would close the World Bank. There is 

little reason for it in the world of economic capital flows of the 

magnitudes that we experience. 

And second, I would put prudential restrictions on International 

Monetary Fund lending, because the International Monetary Fund 

lends to countries such as Ukraine and Romania, which will have 

extreme difficulty in paying back those loans. We pay a substantial 

part of those loans. We should put some restrictions on how they 

are used. 

Thank you. 

[The prepared statement of Dr. Meltzer can be found on page 53 

of the appendix.] 

Chairman CAMPBELL. Thank you, Dr. Meltzer. 

Next, Dr. Desmond Lachman is a resident fellow at the American 

Enterprise Institute. He served as the deputy director of policy development review at the aforementioned IMF. He worked as managing director and chief emerging-market economic strategist at 

Salomon Smith Barney. And he has previously taught at Georgetown and Johns Hopkins Universities. 

Welcome, Dr. Lachman. You are recognized for 5 minutes. 

STATEMENT OF DESMOND LACHMAN, RESIDENT FELLOW, 

THE AMERICAN ENTERPRISE INSTITUTE 

Mr. LACHMAN. Thank you, Mr. Chairman. Thank you for inviting 

me to testify before this committee today. 

Let me start by saying that U.S. monetary policy typically has 

significant spillover effects on the rest of the world economy. It 

does so both through the way in which it affects the state of the 

U.S. domestic economy as well as the manner in which it influences capital flows from the United States to the rest of the world. 

8 

The unusually large degree of U.S. monetary policy loosening 

over the past 5 years has been no exception to the rule. Indeed, 

there is every reason to believe that the very large scale and the 

form of the most recent episode of U.S. monetary policy easing has 

had more than the usual degree of spillover to the rest of the world 

economy. 

Since the end of 2008, the massive easing in monetary policy by 

the Federal Reserve and by the central banks of other major advanced countries has resulted in substantial capital flows into the 

emerging markets. According to International Monetary Fund estimates, foreign portfolio investments in emerging-market country 

bonds has risen by a cumulative $1.1 trillion through 2013, and 

this has amounted to as much as 2 percent of the recipient countries’ gross domestic products. 

These capital flows have compromised the economic fundamentals of a number of key emerging-market countries by undermining 

market discipline, and in many cases they have resulted in excessive currency appreciation. In particular, emerging-market borrowing rates have been reduced to levels below those that would 

be justified by those countries’ economic fundamentals. 

In a number of notable cases, including Brazil, Indonesia, India, 

South Africa, and Turkey, easy financing has led to the postponement of much-needed structural reforms and budget adjustment. It 

has also led to excessive credit expansion and to the buildup of financial leverage, making these countries vulnerable to any sudden 

stop in capital flows. 

Of even greater concern for the global economic outlook than the 

emerging markets is the complacency presently characterizing European policymakers concerning the European sovereign debt crisis. Lower borrowing costs in Europe, which has been facilitated in 

large part by Federal Reserve easing, have lulled European policymakers into a false sense of security. This has substantially reduced the impetus for much-needed policy reform and adjustment 

in the European economic periphery, and it has delayed Europe’s 

move towards banking and fiscal union, which would be necessary 

for the survival of the euro. 

In determining the pace at which it unwinds its quantitative easing program, the Federal Reserve will need to be very mindful of 

the international spillovers of its policies. This would particularly 

appear to be the case given the large impact that the massive expansion of its balance sheet over the past several years has had on 

the economic fundamentals of a number of key emerging-market 

economies and on those countries in the European economic periphery. In recent years, the emerging-market economies have accounted for more than half of world economic growth, which means 

that any significant slowing in those economies could have a material bearing on the U.S. economic outlook. 

The key challenge for the Federal Reserve will be to find the 

right balance in the pace at which it exits quantitative easing. Too 

slow a pace of exit could further contribute to the undermining of 

market discipline in emerging-market economies and in the 

eurozone. At the same time, too fast a pace of exit runs the risk 

of a sudden stop in capital flows to the emerging-market economies 

and Europe, which could be disruptive to the global economy. 

9 

An indication of the downside risk to the global economy that 

could be posed by an unwinding of quantitative easing was provided by the sharp selloff of emerging-market assets in the aftermath of Chairman Ben Bernanke’s intimation last May that the 

Fed had under consideration the unwinding of its third round of 

quantitative easing. 

In the 6 months following that testimony, the currencies and 

bonds of those emerging-market countries which had experienced 

high rates of credit expansion and had wide external current account deficits, including notably Brazil, India, Indonesia, South Africa, and Turkey, all came under considerable pressure. This pressure has forced those countries to substantially tighten their macroeconomic policies, which has resulted in a marked slowing in 

their economic growth and which has forced the IMF to downgrade 

its economic growth outlook. 

Thank you, Mr. Chairman. 

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

42 of the appendix.] 

Chairman CAMPBELL. Thank you, Dr. Lachman. 

Next, Dr. Arvind Subramanian—did I get that right? 

Mr. SUBRAMANIAN. Perfect. 

Chairman CAMPBELL. Dr. Subramanian told me before the hearing here that when he was younger, people just called him ‘‘Superman.’’ So I may just call him—we can all just call him ‘‘Dr. Superman’’ if you have trouble with ‘‘Subramanian.’’ 

Dr. Subramanian is a senior fellow with the Peterson Institute 

for International Economics, and a senior fellow with the Center 

for Global Development, and has been assistant director for research of the aforementioned IMF, the International Monetary 

Fund, and staff of the General Agreement on Tariffs and Trade. 

Welcome, Dr. Superman. You are recognized for 5 minutes. 

STATEMENT OF ARVIND SUBRAMANIAN, DENNIS 

WEATHERSTONE SENIOR FELLOW, THE PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS, AND SENIOR FELLOW, THE CENTER FOR GLOBAL DEVELOPMENT 

Mr. SUBRAMANIAN. Thank you, Chairman Campbell, and members of the subcommittee for giving me this opportunity to testify. 

I want to use this opportunity to look back in order to look forward. 

And, in particular, I want to look back on the Fed’s role over these 

last few years in order to draw policy lessons for the broader and 

vital issue of American global economic leadership. That is a topic 

dear to my heart, as perhaps one of the few non-Americans testifying before you. So, to that end, I want to offer three reflections 

and perhaps two, maybe two and a half, policy suggestions. 

So, reflection number one: As the world’s largest economy, its financial epicenter and the issuer of the prime reserve currency, the 

dollar, actions by the Fed will unavoidably affect other countries 

via trade and exchange rates, capital flows, and overall financial 

conditions. That is unavoidable. 

Reflection number two: Against that background, QE has generally and on balance had a positive effect on emerging markets 

and the global economy. To be sure, in some instances they have 

added to pressures and volatilities, complicating macro-manageVerDate Nov 24 2008 12:31 Aug 26, 2014 Jkt 088519 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\88519.TXT TERRI
10 

ment, but the broad impact has really depended on what the global 

macroeconomic situation is and the situation in individual countries. 

Let me give two examples. QE1 was positive and universally 

seen as so because it saved the world economy from collapse. So 

that was good for the United States and good for the world economy. 

Second example: Take QE3 or, actually, the talk of withdrawal 

that Chairman Bernanke started in May of last year. Many EMs 

did face serious problems, as my colleagues have noted, but the 

pressures were not uniform and were felt acutely in some countries 

that were more vulnerable than others. 

To lay all the blame on the Fed is to forget that being exposed 

to U.S. policies is part of the deal of financial globalization that 

emerging markets and others, as consenting adults, have voluntarily signed on to. They could have chosen to be less financially 

globalized like China, or they could have made their economies 

more resilient by adopting better policies. I am a Hindu and not 

a Christian, but let me invoke scripture: The Fed is not thy brother’s keeper. 

That being said, it leads to reflection number three: The Fed has 

been broadly mindful of its international responsibilities and, 

quietly but effectively, has shown remarkable international economic leadership. It provided dollar swap lines to central banks in 

emerging markets, and it has provided liquidity to Europe and the 

Bank of Japan. And these actions did contribute to calming conditions in these crisis-ridden years. 

There is something remarkable that needs to be noted here, Mr. 

Chairman. These emerging-market countries during the crisis 

chose not to go to the IMF, even though the IMF after the Asian 

financial crisis was seen as an instrument of American hegemony. 

Instead, they chose to come straight to the United States and deal 

with the Fed. 

Point number two: It is remarkable because when the Fed helped 

Europe through these swap lines, at that time the rest of the U.S. 

Government was a bystander because of its own problems, able to 

offer counsel but little cash to these economies in crisis. 

So, in some ways, what I want to stay is that in some ways the 

Fed has played a very constructive global role, so the question is, 

what can the rest of the U.S. Government, and this subcommittee, 

in particular, do by way of global economic leadership? 

So that leads me to policy recommendation number one. Mr. 

Chairman, you are close to this. I think the U.S. Congress should 

work with the Administration to ensure the necessary legislation 

to augment the IMF’s resources, to include it in the omnibus appropriation bill. 

Why do I say that? As positive as the Fed’s role has been in relation to crises, I think that job should not be that of the Fed; it 

should be that of the IMF. Congressional passage of IMF legislation would be relatively cheap, if not costless. It would protect the 

United States and the world against crises. And, above all, it would 

allow the United States to share the burden that, in some ways, 

it is exclusively taking on via the Fed. To me, this would be a sign 

of reversing U.S. enfeebled economic leadership. And it is awkward 

11 

for me to say this, but the United States is the only major country 

which stands in the way of this legislation. 

Which leads me to policy recommendation number two, because 

this subcommittee also deals with trade. And, Mr. Chairman, you 

talked about the feedback effect of QE policies back on the system. 

There is some uncertainty now whether U.S. bilateral investment 

and free-trade negotiations limit the ability of partner countries to 

deal with financial stresses. I think the negotiations on the TPP 

offer an excellent opportunity for clarifying that the United States 

does not aim to circumscribe or eliminate legitimate policy instruments by its trading partners—for example, prudential controls on 

inflows and broader controls on balance-of-payments grounds—to 

respond to the pressures from financial globalization and crises. 

This clarification would also be consistent with the IMF’s new 

thinking on capital controls. 

Finally, my half-recommendation: I have argued in my testimony 

that QE has not led to greater manipulation by the emerging-market countries. In fact, the era of QE has coincided with a reduction 

in foreign exchange intervention and imbalances. But independently of QE, currency manipulation is a problem for the world system because it is a trade distortion. However, I feel that the best 

way to address it would be multilaterally in the World Trade Organization. 

An alternative, of course, would be to address it in the TPP, but 

this should be done carefully, making sure that the issue is not 

captured by a few constituencies in the United States and derails 

the prospects of broader trade liberalization under the TPP. 

Thank you, Mr. Chairman. 

[The prepared statement of Dr. Subramanian can be found on 

page 61 of the appendix.] 

Chairman CAMPBELL. Thank you, Dr. Subramanian. 

The Chair now recognizes himself for 5 minutes for the purpose 

of questioning. 

Thank you all for your testimony. 

I think I heard a resounding agreement, at least, that QE does 

have an impact—QE and the United States has an impact on foreign markets and on the international economy generally. I heard 

from a bunch of you things like currency manipulation, trade barriers, disruption, current account deficits, capital flows, all kinds of 

different things like that. And Dr. Subramanian has a different 

view as to the efficacy of this world impact than the other three 

of you do. 

What I want to try and do is have you each respond to each other’s points, if you will. But, also, if we can make this sort of at a 

first-grade level rather than all of the ‘‘economic-speak.’’ Let’s try 

and say, what is the impact, what is the basic fundamental impact? 

So Dr. Steil, Dr. Meltzer, or Dr. Lachman, any of you whom I 

think do not agree with Dr. Subramanian that the impact has been 

positive—Dr. Lachman, you look like you are ready for your button—give me the greatest negative impact of QE on international 

economics. And refute, if you believe you can, Dr. Subramanian’s 

point. 

Mr. LACHMAN. I guess if you are looking internationally, what 

one is really wanting to do is to distinguish between the short-run 

12 

impact and the longer-run impact. So while the short-run impact 

might be beneficial as the capital is flowing into these countries— 

it lowers interest rates, it boosts growth, and all the rest—what it 

does is it produces market discipline and allows these countries to 

establish imbalances, so when the music stops, when the process 

is unwound, those countries are extremely vulnerable to the slowing of the capital. 

So what I am saying is that, as the capital flows in, it drives 

growth up, everything is okay, but it increases vulnerabilities so 

what we will see now and what we are seeing right now is the key 

countries, known as the ‘‘fragile five,’’ are experiencing great difficulties as this capital is withdrawn because they have allowed 

their currencies to get overvalued and they have very large imbalances. 

So that is really the adverse cost. The cost of QE is not seen immediately; it is, rather, seen when the process is unwound. And 

that has yet to be seen. 

Chairman CAMPBELL. And what are the risks to the United 

States from those vulnerabilities? 

Mr. LACHMAN. The risks to the United States are rather large, 

as we have seen in previous crises, the Asian crisis, for instance, 

in 1998, both in terms of, if you have those economies slowing, they 

are an important part of the global economy, it means that United 

States exports get hit, but the greater risk is to the global financial 

system, that if these countries run into any kind of payment difficulties, that can cause difficulty on the banking system. 

I am not concerned so much about that in terms of the Asian 

countries, but I certainly am concerned about that in terms of the 

European economic periphery. 

Chairman CAMPBELL. And what are the fragile five? 

Mr. LACHMAN. The fragile five are Brazil, India, Indonesia, South 

Africa, and Turkey. And these fragile five are fairly sizeable economies. You just have to think of Brazil and India, two of the bricks. 

And these economies have been accounting for most of the global 

growth over the last 10 years. 

Chairman CAMPBELL. Dr. Subramanian, your response? 

Mr. SUBRAMANIAN. Yes, Mr. Chairman, I think the point here is 

that, as Dr. Lachman said, there is a short-term and there is a 

long-term impact, but there are two key points to note. 

One is that the capital inflows that go to developing countries because of QE, their effect on these countries depends very much on 

how they manage it. If they do things right, it is a huge benefit. 

Similarly, if they have followed sound macroeconomic policies, 

when the capital flows out, the risks are minimal. 

And, therefore, the key point here is that—and one example of 

this is that the impact is, in fact, varied. When, in fact, the capital 

started moving out in May after taper talk, the fragile five were 

affected, but they were affected because they were very 

macroeconomically vulnerable. For example, India, my own country, was one of the worst hit because it had high inflation, fiscal 

deficits of 10 percent, and current account deficits of 4 percent. 

China, Singapore, and South Korea were less affected. 

Chairman CAMPBELL. Okay. My time has expired, so thank you. 

I am sure you will both have plenty more opportunities. 

13 

I will now recognize the gentleman from Illinois, Mr. Foster, for 

5 minutes. 

Mr. FOSTER. Thank you all for appearing on this very complicated subject. I think after I had a voter-enforced vacation a couple of years ago, I spent a while downloading various macroeconomic models and playing with them, and being frustrated by 

the difficulty with the multi-country models and the number of parameters that you had to deal with. And as a physicist, I dream 

that there might be an actual analysis tool here, but I don’t think 

we are anywhere near that. 

But I would like to—in a recent speech, Ben Bernanke talked 

about using mortgage loan-to-value limits as a macroeconomic tool. 

Because one of the themes that is coming out here is the fact that 

actions by the Federal Reserve amplify leverage cycles in developing countries. 

And so that one of the lessons from biology is that if you want 

a stable system, you need a number of distributed feedback loops. 

And so that if each country independently would insulate itself— 

again, as many countries have by hand; when they see an assert 

bubble, they turn up, for example, mortgage underwriting requirements in order to cool down their real estate markets. This is also 

something that could be unwound when the Fed unwinds its own 

policies. 

I was wondering if you have any comments on the concept that 

individual economies can do a lot to insulate themselves from Fed 

policy? Anyone who has thoughts on that? 

Yes? 

Mr. STEIL. I think the data bear that out very strongly, that 

countries can do things to insulate themselves from the impact of 

Federal Reserve policy. 

It has been pointed out that the effect of QE on emerging-market 

economies has not been uniform. The countries that were hit the 

hardest, countries like India, Indonesia, Brazil, and Turkey, had 

certain features—in particular, very large current account deficits. 

Countries that were not hit, say, Singapore, China, and South 

Korea did not have such deficits and also tended to have very large 

foreign exchange reserves. 

My concern is this: If you try to extract policy lessons from this 

experience, they should be a little bit disturbing to us, because if 

everybody in the emerging-market world behaves like South Korea, 

global imbalances are only going to get much worse. The lesson we 

have taught these emerging markets is that in the good times, they 

should apply a firm hand to keep their imports and their currency 

down and their exports and their foreign exchange reserves up. As 

I emphasized in my testimony, broadly speaking, that is what 

many observers in these countries refer to as currency manipulation. And so these— 

Mr. FOSTER. Not all countries can run current accounts surpluses 

simultaneously. There is a— 

Mr. STEIL. That is right, but often, as you know, Mr. Foster, we 

wind up being the market of last resort for countries around the 

world that are insistent on pursuing policies that result in current 

account surpluses. 

14 

So I am concerned that the experience of quantitative easing in 

the emerging-market world will lead to the adoption of policies that 

will increase global trade tensions rather than reduce them. 

Mr. FOSTER. Okay. 

Any other comments? 

Mr. MELTZER. Mr. Foster, I like the way you organized your 

thinking about this problem. I want to add a dimension that has 

been not been here heretofore. 

We have seen 98 percent of QE2, QE3 go into idle reserves. So, 

there is a tidal wave there. We don’t know how it is going to break. 

But what we are describing so far is the effect of a small amount 

of the QE spilling over into the rest of the world. What is going 

to happen when that other 95 percent comes out? Is it going to 

come out in an orderly way, or is it going to come out in a bang? 

Is it going to create havoc in the rest of the world? I don’t think 

anybody can confidently say anything about that, but those are the 

risks which are involved here. 

And we can talk about things that countries can do, but if we have a tidal wave of this money coming out, $2.5 trillion in idle reserves, or more, and growing, and $2 trillion on corporate balance 

sheets, that is a lot of money, and it can create a lot of problems. 

We may be fortunate; we may not. 

The idea that the United States will buffer those problems is 

wrong. We did that because we had a huge import excess because 

of energy. That is going away. The world of the future is going to 

be very different than the world of the past because we are going 

to be in— 

Mr. FOSTER. I think I am running out of time here, so if you 

could wrap up. 

Chairman CAMPBELL. The gentleman’s time has expired. 

And we will now move to Michigan for the next two questioners. 

First, the vice chairman of the subcommittee, Mr. Huizenga, is recognized for 5 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. Again, you are 

bookended by Wolverines on this. 

But I feel like I am honestly drinking—you know the old phrase 

of drinking out of a firehose. I am trying to drink out of four Ph.D. 

firehoses coming at us with information right now. So, I appreciate 

your patience as we are doing this. 

Dr. Subramanian seemed to be indicating and quoting the good 

book as far as should the United States be its brother’s keeper, and 

I am hearing various views on that. I am concerned a bit about 

that. If everyone should be basically on their own, and as my friend 

from Illinois was sort of talking about is, basically are we going to 

have every country sort of insulating itself? 

I am from Michigan. Right? There is a tremendous amount of 

criticism of the TPP coming out of the automotive industry when 

we are talking about Japan. It seems to me that if we are in QEinfinity and maybe see an edge to that cliff here if we are starting 

to dial it back, but we are into these loose money policies, how in 

the world can we be critical of any other country that is going to 

be taking the same defensive actions that we have taken? 

And I am not a Ph.D. I was a poli-sci major, not a hard science 

major. I did take some courses in economics and a concentration in 

15 

that. But one of the first laws of economics that I ever learned 

about was the law of diminishing returns. And it seems to me, as 

we are going from QE1 to QE3, I would assume that there is, as 

Dr. Meltzer is pointing out, this huge, massive buildup in reserves 

that has happened in the banking system here. Are we really hitting our goals and objectives? 

So if you could maybe address those two things. One, how can 

we be critical of any country? Specifically, I think it was Dr. 

Lachman who talked about the Bank of Japan. And then, two, 

what is going to be the effect of these reserves that have been built 

up? 

So, Dr. Meltzer, go ahead. 

Mr. MELTZER. Yes, I like the brother’s keeper. The brothers don’t 

necessarily want a keeper and are probably not going to want that. 

I have had the experience of the Secretary of the Treasury going 

over to Europe and telling them that they need to do fiscal expansion and they laugh at him. That is, they think, take care of your 

own problems; don’t try to tell us how to take care of ours. When 

the United States has much better policies, it could give advice. It 

is in a very poor position to give advice these days on fiscal and 

monetary policy. 

I would like to make a slightly different short point. I am concerned about the problem that the Congress has in performing its 

oversight duties. The only way I believe that you can perform oversight duties effectively is to have a rule, require the Federal Reserve to follow a rule, and then if they don’t follow it, you have a 

question. It is just not possible for members of this committee, 

however diligent they may be, to come and tango, rhetorically, with 

the Chairman of the Federal Reserve. It has never worked. 

Mr. HUIZENGA. Dr. Meltzer, I know you have brought that point 

up about the rule previously. And I am curious, are we in danger 

of the world dismissing or, worse yet, maybe not even believing 

what we are doing or what we are saying we are going to be doing 

if we are not tapering when we said we would taper and some of 

those dates? 

But, Dr. Subramanian, I wanted you to quickly address that, too. 

Mr. SUBRAMANIAN. Let me first try and address the first of your 

questions, how can we be critical of others when we are doing the 

same thing. 

I think it is important to remember that this tidal wave that has 

gone out, first, is not tidal when compared to what happened before 

QE, and second, it is not all due to QE. A lot, in fact a majority 

of the flows to emerging markets have happened because they have 

grown much faster than the United States. 

Mr. HUIZENGA. Economic activity? 

Mr. SUBRAMANIAN. Exactly. And so, for investors, it is much 

more attractive to invest in those countries than 2 percent or 0 percent in the United States. 

Mr. HUIZENGA. I would love to talk about regulatory reform and 

tax reform to help us get that economic activity, but let’s move on. 

Mr. SUBRAMANIAN. But I think the question here is that the 

United States followed QE policies largely to stave off the financial 

collapse and to provide policy support for the recession. The impact 

on the U.S. exchange rate has been relatively modest. In fact, beVerDate Nov 24 2008 12:31 Aug 26, 2014 Jkt 088519 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\88519.TXT TERRI
16 

cause the United States is a reserve currency, in the immediate 

aftermath of the crisis, money came pouring into the United States 

because it was a safe haven. 

And, therefore, I think one shouldn’t fall into the trap of thinking 

that U.S. QE is equivalent to Japanese QE. 

Mr. HUIZENGA. Sure, but isn’t it fair to say that we are— 

Chairman CAMPBELL. Time has expired. 

Mr. HUIZENGA. Gulliver among the Lilliputians is my observation, so—and, with that, Mr. Chairman, thank you. 

Chairman CAMPBELL. All right. The gentleman’s time has expired. 

Perhaps if the other Wolverine wants to let him answer that 

question—that is up to you. By the way, how did that ball game 

go against Kansas State? 

Mr. Kildee is recognized for 5 minutes. 

Mr. KILDEE. I am a functional Spartan right now. 

Chairman CAMPBELL. Oh, yes. Okay. 

Mr. KILDEE. Thank you. 

Sticking with the Michigan theme, I would like to take the conversation sort of down to more of a Main Street, local economic 

level, at least from my point of view. I represent Flint, Michigan, 

but a lot of the district that I represent is part of an older industrial corridor that has struggled mightily in making the transition 

to the new economy. Michigan unemployment currently stands at 

8.8 percent, the second or third highest, I think, in the country, 

and it has been a condition that we have struggled with mightily. 

And so the question that I have is—and if Dr. Subramanian 

would respond and perhaps others might comment—as many 

Americans continue to struggle with unemployment, and given the 

Fed’s mandate, even yet, Congress has failed to extend emergency 

unemployment benefits that could affect—is affecting 1.3 million, 

could go up to 2 million people sometime in March. And, of course, 

the effect on many States is disproportionate, in my State particularly. 

And I am just curious, if you would comment on—because it 

seems the Fed’s use of QE has been critical to help the economy 

recover and put people back to work. And in the context of that policy, can you talk about ways that we can balance our domestic obligations to grow the economy and create jobs, which is absolutely 

critical in my district and in other parts of the State, while still 

mitigating the negative aspects of policies on emerging markets as 

the Fed decreases its use of QE? 

Mr. SUBRAMANIAN. That is a great question, and my response 

would be the following: that, as you said, the Fed’s primary responsibility is to the U.S. economy. And, generally, I think it is accepted 

that certainly early bouts of QE have provided very vital policy 

support for the economy. Now, I would not necessarily buy into the 

view that this has come at the expense of other countries, because, 

as I said, other countries have had the policy instruments to deal 

with that. 

But the Fed has, in fact, addressed the international dimension, 

to the extent it can, by providing this liquidity to countries in trouble. Brazil, Mexico, Singapore, and South Korea came to the U.S. 

Fed for help, and that helped calm conditions. 

17 

So I would take this one step forward and say the way to reconcile the domestic and the international responsibilities would be 

for the Fed to do what it needs to do for the U.S. economy, but for 

the rest of the U.S. Government to ensure that other things can be 

done for other economies. 

And I come back to, the best that Congress can do now is, in fact, 

to support to increase the IMF so that in the future, if there are 

crises, which it is true will come back to the United States and 

haunt the United States, but the way to address that is to fund the 

IMF and provide it with the resources to deal with international 

crises so that the effects on the United States is minimized. 

Mr. KILDEE. Any other—Dr. Lachman? 

Mr. MELTZER. Let me comment on that. 

Mr. KILDEE. I’m sorry. Or Dr. Meltzer, either one. 

Mr. MELTZER. You might want to explain to your constituents in 

Flint why it is in the interests of the United States for the United 

States to finance the IMF to lend money to France, Germany, and 

so on, but especially to France, which refuses to make serious adjustments in its policy, why that is a good policy for the United 

States. 

Why don’t we just say to the French, ‘‘Look, you have a serious 

problem—and they do—and you have to deal with it. It is not our 

problem, it is your problem.’’ Why should the United States be 

lending to Ukraine through the IMF? Ukraine is a basket case, in 

most cases, and is making decisions which are not in our interest. 

Why should we do that? 

Why should the United States be lending money—and I will stop 

there—to Iran through the IMF? It doesn’t seem to me to be consistent with anything that we could call sensible U.S. policy. 

Mr. KILDEE. Dr. Lachman? 

Mr. LACHMAN. If one is talking about the IMF, a point that is 

really very important to bear in mind is that most of the IMF lending of the last few years has been to the European countries. It is 

something like 70 or 80 percent of their lending. 

The European Central Bank has now set up a mechanism, the 

Outright Monetary Transaction mechanism, that can provide an 

unlimited amount of funding, which really raises questions as to 

does the IMF actually need the amount of money that we thought 

they needed 2 or 3 years ago, when you have the ECB that is able 

to take care of most of those European countries? 

Chairman CAMPBELL. The gentleman’s time has expired. 

We will move from Wolverines to Hoosiers. The gentleman from 

Indiana, Mr. Stutzman, is recognized for 5 minutes. 

Mr. STUTZMAN. Thank you, Mr. Chairman. Unfortunately, I can’t 

brag about any big football games this past couple of weeks. But, 

anyway, thank you. 

I appreciate the testimony. This has been a fascinating discussion, and obviously one that the United States plays a huge role 

in, in the global economy. 

And I appreciated, Dr. Steil, your comments, and they do seem 

to be—it was a lot of common sense when you said, in good times, 

that developing countries should apply a firm hand to keep their 

imports and currency down and their exports and dollars reserves 

up. But, unfortunately, not many of us follow that advice. 

18 

Could you comment on—many of us in Congress have been critical of capital controls and some of the other restrictions. Experts 

have suggested using tariffs and other countervailing measures to 

shelter U.S. firms from their effects. Doesn’t this lead us into a 

race to the bottom or a currency war morphing into a potential 

trade war? 

Dr. Steil, could you comment on that? 

Mr. STEIL. Specifically with regard to the use of capital control? 

Mr. STUTZMAN. Yes, sir. 

Mr. STEIL. Yes. I think we should be concerned with the, say, arbitrary use of capital control, say, in the midst of some sort of domestic crisis when governments take actions that are targeted, for 

example, at certain firms, certain investors, to prevent the repatriation of capital. I think these rules have to be clearly laid out in 

advance. They must not be arbitrary and be directed at specific individuals or firms or interests; they must have general applicability. And the purpose must be set out. 

As I emphasized at the end of my presentation, I think emergingmarket governments should be free to use restrictions on shortterm portfolio inflows clearly laid down in advance as a means of 

ensuring that they don’t, after absorbing such inflows, have to face 

the problem of arbitrary restrictions in order to stop the outflows. 

And I use Chile as an example of a country that did, in fact, use 

such modest restrictions very prudently in the 1990s and appears 

to have done so quite successfully. 

Mr. STUTZMAN. Is there any other country today that you would 

point to that is doing something similar to what Chile did back in 

the 1990s? Is there anyone? 

Mr. SUBRAMANIAN. Brazil did it in 2009. Not exactly the same, 

but they imposed taxes on certain inflows from abroad. 

Mr. STUTZMAN. Okay. Thank you. 

Mr. STEIL. The difference between Brazil and Chile is that Chile 

implemented this policy during the good times, not arbitrarily in 

order to prevent an imminent crisis from unfurling. Brazil has been 

much more reactionary, and I think that is the problem there. 

Mr. STUTZMAN. Thank you. 

Dr. Meltzer, if you could comment a little bit, you mentioned 

long-term stability, that is what we are all looking for. But you also 

mentioned, go back to your testimony, in a couple of different 

places regarding the international gold standard. You mentioned it 

in your point number five. Like the old international gold standards, markets would do the enforcement. Could you touch on that 

a little bit more? Should we look back at the ways that we used 

to do things and maybe reconsider how we do support our currencies? 

Mr. MELTZER. Thank you. Way back in the 1970s, I used to debate occasionally with a former member of this committee whom 

you all remember, Mr. Paul, and I usually ended up by saying to 

him that the reason we don’t have the gold standard is not because 

we don’t know about the gold standard; it is because we do. So we 

would like to get some of the benefits of the gold standard without 

getting the costs of the gold standard. And the costs of the gold 

standard are it puts attention on something that none of your constituents would really want. That is, it says they are going to give 

19 

priority to maintaining the exchange rate. That is not what they 

want. They want the priority to be maintaining good economic conditions at home. 

So I have tried to come up with a system that says, let’s try to 

get the virtues of the gold standard, which was market enforcement, not meetings of central bankers, but markets deciding 

whether you are doing the right thing or not, that sort of thing, to 

get an enforcement mechanism and to capture the public good 

which has been lost since the breakdown of the Bretton Woods system, which is to have countries get the benefits of price stability, 

which is of great virtue, and exchange rate stability to the extent 

possible that we do that with price stability. That is the idea. 

Mr. STUTZMAN. Thank you. I would love to have a longer conversation with you about that. But thank you. 

Mr. MELTZER. I would be happy to do so, any time. 

Mr. STUTZMAN. I will yield back. 

Chairman CAMPBELL. Thank you. The gentleman’s time has expired. 

The gentleman from Delaware, Mr. Carney, is recognized for 5 

minutes. 

Mr. CARNEY. Thank you, Mr. Chairman. I didn’t think you would 

know who the mascot for the University of Delaware team is; it is 

the Fighting Blue Hens. So you go from the Hoosiers to the Fighting Blue Hens over here for future reference. 

Chairman CAMPBELL. I am so pleased that you have filled that 

bit of ignorance in my— 

Mr. CARNEY. And thank you to the panelists for coming. This has 

been a very interesting, if not difficult, esoteric and difficult to understand conversation. My Ph.D. physicist colleague, Mr. Foster, I 

think tried to simplify it a little bit, as he looks at the world 

through biological systems, which didn’t help me at all. And I 

would kind of like to go back a little bit to have you comment not 

maybe on a first grade level, as the Chair requested, but kind of 

on the basic level that I try to communicate with my constituents, 

to just answer the basic question, why does it matter? Why does 

it matter to the people in my State of Delaware, is really the first 

question I have. 

Dr. Meltzer, you have been kind of touching on that. 

Anybody else? Dr. Subramanian? 

Mr. MELTZER. Your constituents want stability. 

Mr. CARNEY. Right. 

Mr. MELTZER. One of our major problems is we don’t have it. And 

we haven’t had it. We have had a lot of ups and downs. In the history of the Fed, to go there, in the 100 years, the best period, the 

only long period of relative stability with good growth, low inflation, and short and mild recessions was when they more or less followed something called the Taylor Rule. 

Now, why did that work well? Because unlike most of what they 

do, the aim was on a longer-term objective. They are crowded and 

pushed by the markets, by the Congress, perhaps by economists to 

do things which are mostly short run in nature. 

Mr. CARNEY. But my constituents obviously are focused more on 

the unemployment rate in the State, which in Delaware is a little 

bit better than the rest of the country. But they are still focused 

20 

on that as opposed to what the Fed is doing with QE1, 2, or 3, or 

what-have-you. That is the major focus in the bulk of the feedback 

that I get. 

Mr. MELTZER. Yes. I will quote Paul Volcker, whom this committee certainly remembers. Mr. Volcker said the way to get low 

unemployment was to have low expected inflation. That is, depend 

on the markets. Don’t try to get the unemployment rate down by 

raising the inflation rate and then trying to get the inflation rate 

down by raising the unemployment rate. That just gives you a lot 

of noise and variance in the system. So what Mr. Volcker said was 

what I would call the anti-Phillips curve approach, get the expected 

inflation rate down and anchor it down as best as you can. And 

then, the markets will provide jobs and prosperity. 

Mr. CARNEY. Dr. Subramanian, you had a— 

Mr. SUBRAMANIAN. I think it is a great question, why it matters. 

I think the way I would think about it is to say that if we do something in the United States that affects other countries, it can come 

back to haunt us, because then they buy less goods and services 

from us— 

Mr. CARNEY. Right. 

Mr. SUBRAMANIAN. —which contributes to unemployment. Or in 

the case of Delaware they may say, well, we don’t want foreign financial service providers in our country because they try and impose capital controls, and that is going to hurt Delaware. 

So I think that is the reason why one has to impress upon our 

own constituents that we have to make sure what we do doesn’t 

negatively impact others, because it could come back to haunt us 

in a globalized, interconnected world. 

Mr. CARNEY. One last quick question. I have about a minute left. 

We are talking about international impacts here with respect to 

Fed policy. What about if Congress did not raise the debt ceiling, 

what should we be concerned about there? Dr. Meltzer, would you 

like to— 

Mr. MELTZER. That is not a sensible policy. You have to raise the 

debt ceiling. I agree with those who say you have incurred the responsibilities. You don’t want to concentrate on raising or not raising the debt ceiling. You want to concentrate on a longer-term policy which says we won’t have to raise the debt ceiling again in the 

future, next year or the year after. Do that. That is an effective policy. That is something you can do. 

Mr. CARNEY. Any sense of what the negative impacts might be 

if that happened? 

Mr. MELTZER. Yes. It would say that the U.S. debt is highly 

risky. Because you don’t know— 

Mr. CARNEY. Would it endanger our position as having the reserve currency? 

Mr. MELTZER. Yes. 

Mr. CARNEY. So maybe at another time we can have a conversation about what impact that would have. 

Mr. MELTZER. Let me amend that by saying if you don’t raise the 

debt ceiling for a week or a month, that would be bad, but it 

wouldn’t destroy the value of the dollar. 

Mr. CARNEY. Fair enough. My time is up. Thanks very much. I 

appreciate your time today. 

21 

Chairman CAMPBELL. Thank you. The gentleman’s time has expired. And I have waded into the battle between Gamecocks and 

Tigers before, so I won’t do it. I will just recognize the gentleman 

from South Carolina, Mr. Mulvaney, for 5 minutes. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

And thank you, gentlemen, for doing this today. 

I want to touch on what I think is a related but a little bit different topic. We had Dr. Bernanke come not before this committee 

several years ago, but a different committee that I was on at the 

time, to explain to us at that time not a new policy, but something 

the Fed was expanding at the time called U.S. dollar liquidity 

swaps. This is another way that the Fed policy involves other countries, other central banks. It was a temporary program from its inception. And then I think in late October of this year, without 

much fanfare, it was made permanent. And this facility is now a 

permanent facility between the Federal Reserve and three or four 

other central banks. The bank explained why it was doing that. 

The bank said that it wanted to bring some stability and a known 

quantity or a known facility into play. And I understand that. 

Here is my question to you: Should we be concerned about this? 

It got very little attention. When they initially put the temporary 

program into place in 2007 and extended it again in 2010, it got 

a lot of attention, it seemed like it did. The Fed Chairman came 

to a committee to tell us about it. But when it was made permanent in October of last year, it got very little press. There was actually only one commentator I could find who raised a red flag. He 

said permanent liquidity swap agreements will subject national 

monetary policies even more strictly and unrelentingly to the dominance of the Fed. Central banks around the world will increasingly 

emulate the Fed’s monetary policy. 

So as we sit here and talk about the impact of Fed policy on 

other nations, should we be concerned or not about the fact that 

this swap facility is now permanent? And I will throw that open 

to anybody who wants to talk about it. 

Dr. Steil? 

Mr. STEIL. I should emphasize that this facility was only made 

permanent with the five developed market central banks. 

Mr. MULVANEY. True. 

Mr. STEIL. The credit risk to the Federal Reserve in the United 

States on these transactions is literally infinitesimal. I think it is 

very— 

Mr. MULVANEY. The credit risk or the interest rate risk? I understand the interest rate risk is actually zero. But you think the credit risk is zero as well? 

Mr. STEIL. Absolutely. 

Mr. MULVANEY. Okay. 

Mr. STEIL. We are effectively getting valid collateral for these 

swaps that is not going to collapse in value overnight. I want to 

emphasize that we have only made these facilities permanent with 

five of the most credible central banks in the world. 

Mr. MULVANEY. Japan and Canada, the Europeans. Okay. Right. 

Mr. STEIL. The Swiss Central Bank, the Bank of England. I 

think it is important that we make it permanent because in a crisis, when banks in developed markets are struggling to ensure dolVerDate Nov 24 2008 12:31 Aug 26, 2014 Jkt 088519 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\88519.TXT TERRI
22 

lar liquidity, you can have a contagion effect where, for example, 

U.S. banks are reluctant to deal with European banks because they 

think that they would have a shortage of dollar liquidity. So I think 

it is very important that the developed central banks of the world 

do cooperate to ensure that we don’t get into that situation. 

Mr. MULVANEY. Is that the consensus? Dr. Subramanian? 

Mr. SUBRAMANIAN. I would go one step further. My first point is 

that this has been one of the resounding successes of Fed policy, 

not just in Europe, but also after the Lehman crisis when, as I 

said, emerging market countries wouldn’t go to the IMF, but came 

to the Fed because they needed that liquidity. 

Point two, it is a technical point that now these swaps are twoway swaps. It can happen both ways. It is not just everyone coming 

to the Fed. It is technical, but I think it is important to note. 

But what I think the third and most important point is that because of the success of this policy, many commentators now are 

saying that this in fact should be generalized, and in fact the IMF 

should become the coordinator of these facilities more broadly because it had such a positive impact. And I think that shows the 

Fed has played a very important leadership role in this regard. 

Mr. MULVANEY. Okay. And that concerns me just a little bit because that would effectively reduce competition, I would think, between the various countries. 

Dr. Meltzer, do you want to check in on this? 

Mr. MELTZER. We started this policy way back in 1962, and it 

lasted until sometime in the 1980s, and then it has been reinitiated. It was, generally speaking, a two-way policy. Mostly we lent 

to others, but on occasion they lent to us. It did good, not much 

harm. I don’t have any particular concern about it. 

Mr. MULVANEY. Thank you, gentlemen. I had another question, 

but I only have 20 seconds left, so I will yield back. 

Thank you, Mr. Chairman. 

Chairman CAMPBELL. The gentleman yields back. 

The gentleman from North Carolina, Mr. Pittenger, is recognized 

for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

And thank you, gentlemen, for your service and your input today. 

Dr. Meltzer, I have very much appreciated your views regarding 

the long-term stability of the markets and the economies. And that 

needs to be the focus for our solutions. But I would say that as 

Chair of the International Financial Institution Advisory Commission, the Meltzer Commission, you have taken a hard look, an indepth look at the international financial system. And as such, I 

guess I would like to have just more analysis for my understanding 

of your view of the world economy that is flooded by the U.S. dollars and how that impacts the world economies, and as well what 

happens when the Federal Reserve needs to unwind on its balance 

sheet. 

Mr. MELTZER. That is a tall order, sir. 

Mr. PITTENGER. You can handle it. 

Mr. MELTZER. Let me just say, to be brief, I think the danger 

that I see is that we could have a very rough time in the future 

because we have so much liquidity in the system, and we don’t 

know where it is going to go, or when it is going to go, or if it is 

23 

going to go. We just don’t know. And that is a huge uncertainty 

hanging over the system. We need to rein that in. As I said before, 

we have QE with $2.5 trillion on the Fed’s balance sheet, on the 

banks’ balance sheet, and $2 trillion on the corporate balance 

sheets or more. 

What can adding more liquidity do? Nothing that the banks and 

the others can’t do by themselves. So the best thing we could do 

would be to end QE now and have the Fed come up with a detailed, 

clear plan of how, over time, they are going to reduce that $2.5 trillion. One of the most foolish things that I have seen happen is to 

say we are going to tie the end of QE to the current unemployment 

rate. First, that is a noisy number. Second, it gets revised substantially, as you know. Third, it came down mainly because people 

dropped out of the labor force. That is bad, not good, because we 

are losing a lot of skilled labor. So why is that a reason why you 

want to either do or not do QE? 

What you need is to say, look, this is a problem that is going to 

take years to solve. So what we need is a conditional strategy. And 

they should come in here and tell you, this is how we plan to do 

it, and this is the conditional strategy we have that is going to last 

over the next 3 or 4 years. 

Mr. PITTENGER. Thank you. 

Would any of the rest of you care to comment on this? 

Mr. LACHMAN. I think when you are looking at the unwinding of 

QE, you have to look at what is its likely impact going to be on 

long-term bond yields. Basically, what we have seen during the period of QE is long-term interest rates in the United States were 

brought down to the lowest level that they have been in the postwar period. We were down to something like 1.6 percent on 10-year 

bonds. As the Fed unwinds, the expectation is that those yields 

would rise. We are already at 3 percent on 10-year yields. And that 

would have a huge impact on capital flows back to the United 

States. And that is really what puts pressure on the rest of the 

world, these emerging markets that didn’t use the good times to 

strengthen their buffers against such an eventuality. So when the 

money comes back to the United States, you would expect to see 

disruption in a number of key emerging market economies. 

Mr. PITTENGER. Dr. Steil? 

Mr. STEIL. Two very, very brief points. With regard to the 

unwinding of QE, I am very concerned about the composition of the 

Fed’s balance sheet much more than I am with the size of it, in 

particular the $1.5 trillion in mortgage-backed securities. Chairman Bernanke has made it clear that he doesn’t wish to sell these 

securities, so he is going to have to use unconventional means of 

tightening policy when the time comes. Among the tools that he 

has mentioned are term deposit auctions. These have been used in 

Europe, and they have been used unsuccessfully. We have had 

many failed auctions in Europe. And I am concerned about using 

them here in the United States. 

The second concern I have is that the Fed has been sending conflicting messages through its forward guidance about when it intends to tighten policy. In November of 2012, it laid out a date 

marker. It said that it wouldn’t tighten policy, raise interest rates 

until the middle of 2015. One month later it changed that guidance 

24 

and said that it would use a data-based marker. It said it wouldn’t 

do so until the unemployment rate hit 6.5 percent. It said that 

those two policies were consistent at the time, but they are now inconsistent because the Fed is expecting unemployment to hit 6.5 

percent this year. 

The market, interestingly enough, is still hanging on the Fed’s 

original guidance and believes that the tightening is not going to 

come until the middle of 2015. So, there is a potential train wreck 

here. 

Mr. PITTENGER. Thank you. 

Chairman CAMPBELL. The gentleman’s time has expired. 

The gentleman from New Mexico, Mr. Pearce, is recognized for 

5 minutes. And following that, with the panel’s indulgence, we will 

do a quick second round of questions. Some of our Members have 

some follow-up questions. 

So, Mr. Pearce is recognized for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

I appreciate each of you being here today. 

Dr. Subramanian, in Dr. Steil’s testimony he said that one of the 

effects of quantitative easing was encouraging investors to shift resources into riskier assets. Is that a problem? In other words, you 

are pretty high on the positive effects of the QE. So, if you would 

address that question. 

Mr. SUBRAMANIAN. Yes, it does have that effect. Both domestically, money becomes very cheap, lower yielding assets, so you are 

moving to higher risking assets. But in some ways that is the point 

of QE, to encourage the private sector to move into riskier assets 

because they are unwilling to take on risks otherwise. 

And then on the international front, of course, when QE happens, investors also shift into assets in India, Brazil, China, et 

cetera, et cetera. Now, whether you would view that as riskier or 

not, I think all investors make this tradeoff between returns and 

risk. So in that sense, it is a difficult evaluation to make. Yes, they 

go into riskier assets, but these are also higher return assets. And 

that is the way QE works. 

Mr. PEARCE. As we take this all the way down to the individual 

level, seniors are the most likely to have unsophisticated assets, 

not risky. All they are wanting to do is clip coupons. My mom is 

87. She doesn’t want to invest in a riskier asset in India. Yet, the 

bank account which she and dad took years to set aside is getting 

one-quarter of 1 percent. And so many of those seniors were driven 

into riskier assets without the sophistication or the desire. Can you 

address that possible downside effect? 

Mr. SUBRAMANIAN. One effect of QE is a kind of implicit tax on 

savers, especially savers of safe assets. But the theory and the expectation is that because that encourages more investment, consumption, economic activity picks up, and so that is broadly on balance therefore whatever costs are inflicted to savers are offset by 

the higher growth, the higher employment that would otherwise be 

the case. 

Mr. MELTZER. Sir, good for you raising the question about seniors. If history is any guide, those decisions are going to end in 

tears. 

Mr. PEARCE. Those decisions are what? 

25 

Mr. MELTZER. Going to end in tears. 

Mr. PEARCE. Yes, they are ending in tears right now, because my 

constituents are telling me, I lived my life correctly, meaning I cannot go back and live my life again, and you in Washington, meaning I think the Federal Reserve, are taking away those things that 

made it possible for us to live in retirement. It is ending in tears. 

And yet to me the Federal Reserve is looking at the effect on our 

seniors as collateral damage. That is an acceptable collateral damage to the Federal Reserve. And I just think that to overlook that 

is really hard. 

I think in the last minute I would like to talk about, if quantitative easing is a good policy and has positive effects, then all 

countries should engage in it, which in fact if Japan is looked at, 

they are quantitative easing at double the rate percentage-wise we 

are. And so could you address the question, if it is good for one 

country, is it good for all countries? And what effect is Japan’s 

quantitative easing policy going to have? 

Dr. Meltzer, if you would take a short stab and it, and then I 

would like Dr. Subramanian to get a chance at it, too. 

Mr. MELTZER. I think that is a definition of disaster. 

Mr. PEARCE. Okay. That is close enough. We only have 29 seconds. 

Mr. SUBRAMANIAN. I think QE policies are things that people 

have to do—countries have to do because they are in extremely dire 

circumstances. Japan has had deflation for 15 years. So it is one 

of the policy instruments that they are using in order to get out 

of 2 decades of deflation. Now, are there going to be collateral costs 

on outsiders? Yes, there are going to be. But that is the calculation 

that the Bank of Japan makes, just as the U.S. Fed makes its own 

calculation. 

Mr. PEARCE. All right. Thank you very much. I yield back, Mr. 

Chairman. 

Mr. MELTZER. Let me say that QE1, I was in favor of QE1, that 

prevented the crisis in 2008. They should have ended the policy in 

2009. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Chairman CAMPBELL. Okay. The gentleman’s time has expired. 

Round two, we will go straight to the gentleman from Michigan, 

Mr. Huizenga, for 5 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

Dr. Steil, I touched on this in my first round, and I think that 

you get at it on, I am not sure which page of your testimony here, 

but you are talking about it now, and I think it is worth recalling 

that Chairman Bernanke had in June suggested that asset purchases would end with the unemployment rate at around 7 percent. 

In fact, tapering is only now just starting with unemployment at 

this level. And just unpack for me a little bit about, my question, 

are we in danger of the world dismissing any of this without Dr. 

Meltzer’s rule that he often brings up, whether it is the Taylor 

Rule or some other rule. Unpack that a little bit for me. 

Mr. STEIL. Chairman Bernanke, perhaps surprisingly, I would 

agree with Dr. Meltzer that we need to move towards a more rulebased environment. He wants there to be targets, for example, and 

forward guidance. The problem is that the Fed has been throwing 

26 

out too many of them. Some of them are conflicting. In some cases, 

the Fed has backtracked from them. For example, this 7 percent 

target that Chairman Bernanke had— 

Mr. HUIZENGA. Do you believe that is for economic reasons or political reasons? Or why are they doing that? 

Mr. STEIL. I believe that at the time they set their guidance, they 

believe it is the best thing to do. Then they revisit the data, they 

have more discussions, they hear criticism in the market, and then 

decide that policy can be improved upon. 

I was rather struck by the rapidity with which they abandoned 

their original date-based forward guidance. You remember in November of 2012 we were told that interest rates would not be tightened until the middle of 2015. We were given an explicit date. One 

month later, we were told that we were not going to deal with 

dates anymore, we were going to deal with data markers, and that 

the particular one that the Fed was going to rely on was unemployment. There are two problems with this. First, too many unemployment targets have been laid out for the markets in terms of, for 

example, when tapering will start, when tapering will end. 

Mr. HUIZENGA. Back to your notion of no predictability and stability. 

Mr. STEIL. Precisely. Second, the monthly employment figures 

themselves are very volatile. And the Federal Reserve, in my view, 

is encouraging the markets to watch those numbers and predictions of the numbers and rumors of the numbers and react to 

them immediately. So this sort of policy of saying we are going, for 

example, to calibrate asset purchases to monthly employment figures could very well unintentionally produce more volatility in the 

market rather than less. 

Mr. HUIZENGA. Okay. 

Dr. Lachman? 

Mr. LACHMAN. I would just make two points. I thought that the 

Fed was very clear when it mentioned the employment figures, the 

unemployment figures, that these were thresholds rather than 

strict guidelines that would automatically, a rule that would guide 

policy. But I think the second, more important point is that one 

really has to consider from the Fed’s point of view that they are 

in totally uncharted territory both in terms of the economic conditions that they are dealing with and the scale of the policies that 

they have embarked on. So I don’t think that you can do anything 

but guide your policies by the economic conditions as they evolve. 

And there is a great deal of uncertainty in the way in which you 

are running this policy. 

Mr. HUIZENGA. All right. In a minute, how do we untangle 

whether we should eliminate the IMF, as Dr. Meltzer was saying, 

or further utilize the IMF with Dr. Subramanian. Anybody care to 

comment on either IMF or— 

Mr. MELTZER. Let me say that I don’t want to eliminate the IMF. 

I want to rein it in. That is our money, to a large extent, which 

is going to the IMF. We are bailing out countries in Europe. The 

countries in Europe are perfectly capable of bailing themselves out. 

Who is going to bail us out? The IMF? Hardly likely. 

Mr. HUIZENGA. I am afraid it is future generations, Dr. Meltzer. 

Dr. Subramanian? 

27 

Mr. MELTZER. Yes, future generations, if they are unlucky 

enough. 

Mr. HUIZENGA. Yes. 

Mr. SUBRAMANIAN. I think that the U.S. investment in the IMF 

is probably a better return than the bull market of 2013. Of very 

little cost, very safe investment. The dirty secret of course which 

I should bring out is that if you are worried about your investment 

in the IMF, as some are, it is senior creditor status always gets repaid regardless of—almost never been not repaid. And it has gold 

backing its credit lines. So there is absolutely no prospect that the 

United States would never get its money back. And it is the best 

insurance against future crises for the United States and the rest 

of the world. 

Chairman CAMPBELL. Even though your time is up, Mr. 

Huizenga, I am going to do chairman’s prerogative because Dr. 

Lachman is just about coming out of his chair. 

Mr. HUIZENGA. I thought his head was going to come off. 

Mr. LACHMAN. I think that what is being overlooked is to whom 

is the IMF lending money. The IMF has never lent money on the 

scale that it has done to as few countries with as bad of credit ratings as the IMF has done. So the exposure of the IMF is to countries like Greece, Portugal, Ireland, and Spain, countries that are 

hugely indebted and that are very likely to need official debt restructuring. So I don’t think that one can take much comfort from 

the fact that in the past the IMF has always been repaid. The IMF 

had never in the past loaned on the scale to countries with as bad 

credit ratings as it has done in the past 5 years. 

Mr. SUBRAMANIAN. Mr. Chairman— 

Mr. HUIZENGA. Gold-backed or not, it doesn’t matter. This is the 

chairman’s territory here. 

Chairman CAMPBELL. Okay. Go ahead. 

Mr. SUBRAMANIAN. I just find it a bit amusing that today, in this 

day and age, Greece and Spain and Portugal and Italy are considered higher risks than in the past Zimbabwe, all of these what we 

call the Third World. The notion that those were somehow better 

risks than— 

Mr. HUIZENGA. I am assuming some of that is scale, though, too. 

Mr. SUBRAMANIAN. But no, Russia, we lent a lot in the Asian financial crisis. 

Chairman CAMPBELL. Here is what I am going to do so this 

doesn’t—I am going to terminate your long past time, Mr. 

Huizenga, and move to Mr. Stutzman. And perhaps Mr. Stutzman 

would like to at least open and see what Dr. Lachman has to say 

on this. 

Mr. Stutzman, You have 5 minutes. 

Mr. STUTZMAN. Thank you, Mr. Chairman. I would like to follow 

up on that. But first I would like to say we did have exciting football in Indiana when the Colts came back. Second greatest comeback to beat the Chiefs on Saturday. 

Chairman CAMPBELL. Since I am a Chiefs fan, you had to bring 

that up. 

Mr. STUTZMAN. Sorry. I should have done my background. 

Chairman CAMPBELL. Your time has been shortened to 30 seconds. 

28 

Mr. STUTZMAN. But, Dr. Lachman, looking at your testimony, 

and you talked about European policy complacency, I would like for 

you to talk a little bit more about that. In one of the statements 

towards the bottom of the one page, you say, ‘‘Meanwhile, the 

stepped-up pace of quantitative easing by both the Federal Reserve 

and the BOJ since September 2012 has contributed to further 

spread narrowing in Europe as investors stretch for yield.’’ Could 

you elaborate on that a little bit more? 

Mr. LACHMAN. Right. Basically, what we have seen over the past 

year is we have seen a marked deterioration in the economic and 

political fundamentals of a bunch of countries in the European periphery. Mainly, I am thinking of countries like Greece, Portugal, 

Italy, and Spain. Yet you have seen enormous amount of interest 

rate reductions, so that these countries now are borrowing at very 

low rates. The way in which you explain that is the activity by the 

ECB through its outright monetary transaction program, saying 

that it would buy the bonds of these countries in the eventuality 

that they came under great stress, but there was also the printing 

of money in the United States and in Japan has led to a lot of purchases of that money. 

My concern is that these low interest rates now are lulling these 

countries into a false sense of security because what we are seeing 

is as their debt levels continue to rise, the budget deficits aren’t 

coming down as programmed. These countries now could be going 

into a deflationary period. So when the music stops, when the 

money isn’t being printed in the United States and Japan, those 

countries are going to be very vulnerable because they are not 

doing the kind of things that they should to ensure that the euro 

survives. 

Mr. STUTZMAN. In your chart here, in figure 5, you have the 

eurozone 10-year government bond yields, and Greece obviously 

spikes dramatically. 

Mr. LACHMAN. Correct. 

Mr. STUTZMAN. Explain to us, why did that happen when you 

have Spain’s and Italy’s remaining relatively flat. 

Mr. LACHMAN. I am not sure exactly what year are you referring 

to? 

Mr. STUTZMAN. Is the spike for Greece— 

Mr. LACHMAN. Basically, what occurred in Greece is that Greece 

eventually defaulted on its debt, it defaulted on its private sector 

debt. The write-down of that debt, the present value was written 

down by as much as 75 percent. So once the country goes through 

a debt structuring it looks a better credit to the private markets. 

That is supportive of the bond yield going forward. But prior to 

that, what this was reflecting was that there was going to be a 

very big debt restructuring, which is in fact what occurred. 

Mr. STUTZMAN. I can’t remember which gentleman it was who 

was talking with Mr. Carney about the debt ceiling. And I don’t 

think there is anyone that I have discussed here in Congress who 

doesn’t want to take the responsibility for our liabilities, short term 

and long term. But what do you suggest, when the conversations 

here—maybe this is just our problem to deal with—but the conversations never seem to be what I think Dr. Steil said about not 

necessarily concerned about the debt ceiling, but the long-term liVerDate Nov 24 2008 12:31 Aug 26, 2014 Jkt 088519 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\88519.TXT TERRI
29 

ability that this country has will then take care of our current debt 

problems. And we have tried to explain that through restructuring 

of long-term liabilities. 

Any advice? We obviously have political arguments to make, and 

also responsibilities that we have to fulfill. But I get very frustrated when we only seem to look short term around here rather 

than looking long term. Any comments? Would all of you agree 

with that? 

Mr. STEIL. This Congress, broadly speaking, I think is very good 

at dealing with crises, as we saw back in 2008. But the long-term 

debt trajectory in this country is not yet seen in Washington as 

being a crisis precisely because we are able to borrow at such low 

interest rates. There are many reasons for that. Obviously, the 

Federal Reserve buying up Treasury debt is one way in which 

those interest rates are held down. Foreigners such as China buying up U.S. debt voraciously is another way. 

Now, I would very much hope that we would be able to address 

our long-term challenges well in advance, without having to have 

the discussion triggered by a crisis caused by a spike in interest 

rates. 

Mr. STUTZMAN. Is QE, though, exacerbating that? 

Chairman CAMPBELL. The gentleman’s time has expired. I have 

to move on to the gentleman from South Carolina, Mr. Mulvaney, 

who can ask that question or whatever questions he would like. 

Mr. MULVANEY. I do want to continue, because you mentioned 

something that Mr. Stutzman and I were talking about during the 

questioning, which is that other countries—folks are willing to lend 

to us at fairly low rates, but we have a Federal Reserve that is effectively printing about $75 billion a month. That is, if my math 

is right, $900 billion a year. That is actually going to be more than 

the deficit this year. So is anybody actually lending us any money 

or are we just printing it all? 

Dr. Steil? 

Mr. STEIL. This money, as Dr. Meltzer has emphasized, has been 

to a great degree locked up in excess reserves. 

Mr. MULVANEY. I understand where it is going. The question is where it is coming from. If the Federal Reserve is printing $900 billion a year and our debt is— 

Mr. STEIL. Literally being conjured as computer blips. 

Mr. MULVANEY. Correct. 

Mr. STEIL. That is the way money is printed in the modern economy. 

Mr. MULVANEY. I am glad that Dr. Bernanke, before he left, decided to back down from his comment that they don’t print money, 

because I think everybody recognizes that is not being entirely 

straightforward. 

Here is the question I had before that I didn’t get a chance to 

ask. A couple of you, I can’t remember who it was at this point, 

mentioned currency manipulation during your opening statements. 

But my question is this. If I were—and if it makes a difference between being a developed country and an emerging market, let me 

know—but if I was a country that was interested in manipulating 

my currency, I assume you would do that mostly to lower the value 

of the currency. I guess there could be circumstances where you 

30 

would manipulate it the other way. But generally we talk about 

lowering the value. Dr. Subramanian, how I would go about doing 

that? What are the traditional tools that a country can use to manipulate its currency downward? 

Mr. SUBRAMANIAN. I think China is the best example, because it 

uses three ways, reinforcing ways of doing it. First, it keeps its 

country relatively closed to capital inflows. So the pressure that 

comes from dollars flooding the market and putting upward pressure on the currency, that is mitigated because China is relatively 

closed. 

Second, what it does is, when the money does come in, and in 

the case of China only some of it comes in via capital, most of it 

comes in because of the current account surplus, what they do is 

the central bank goes in and buys dollars to prevent the currency 

from going up. That is the second way in which they do it. 

Third, that is a problem because when you buy dollars you inject 

domestic currency back into the market and that can create inflation. So to prevent that, they do a third thing, which is to buy back 

some of the renminbi they have injected into the market by issuing 

interest-bearing assets. 

Now, the reason why they get away with it is that normally 

when you do that interest rates would tend to rise and impose 

some costs either on the budget or on the central bank. But because their financial system is repressed, interest rates are very 

low. So often in fact the Chinese central bank makes a profit on 

these activities which would generally be loss making because it 

has to pay very low interest rates. 

Mr. MULVANEY. And let me cut you off because I think you are 

right, in fact I know that you are right, I believe that you are right, 

but you have used China, which is an example that I am a little 

concerned about because of what you have just mentioned, which 

is it is a controlled economy or semi-closed economy. Now, when 

Japan was going through what they went through when Prime 

Minister Abe was put in place, they didn’t do anybody of those 

things, right? Dr. Lachman, you looked like you were getting ready 

to go down that road. 

Mr. LACHMAN. No, precisely, Japan is the prime case that I 

would take of a country that is deliberately cheapening its currency 

through printing a huge amount of money. What we have seen 

since they started this process at the beginning of 2013, is we have 

seen a 20 percent depreciation of the yen, which is the way in 

which they are getting inflation to reemerge in Japan, and they are 

getting the economy to grow through increasing their exports. So 

this is a country that is deliberately using monetary policy; they 

are not going to say that is the objective, but that is basically what 

they are doing. 

Mr. MULVANEY. Okay. Then let me ask this— 

Mr. MELTZER. Let me defend the Japanese for just a moment. 

Mr. MULVANEY. Yes, sir. 

Mr. MELTZER. I spent 17 years as something called the honorary 

adviser to the Bank of Japan, so I learned a little bit about their 

economy. When I went there originally, there were 360 yen to the 

dollar. Eventually, because of the U.S. policy in recent years, it 

floated down to 70 yen to the dollar. At that point, because of U.S. 

31 

policy, the Japanese yen appreciated to 70 yen to the dollar. They 

couldn’t continue to exist at that point. That is why they adopted 

this policy. That was a direct reaction to what we were doing. 

Mr. MULVANEY. I understand that. And that ties in because 

along with my opening questions to Dr. Steil about what we are 

doing in terms of printing money— 

Mr. MELTZER. Absolutely. 

Mr. MULVANEY. —Dr. Lachman, if one of the ways that you manipulate your currency down in a developed economy is to print a 

bunch of money, aren’t we doing that in this country? 

Mr. MELTZER. Yes. 

Mr. LACHMAN. Absolutely. And what this is doing is it is inducing other countries to emulate us. I would totally agree with Dr. 

Meltzer that the United States, by cheapening its country, makes 

Japan’s life impossible, so the Japanese respond by printing their 

currency. The one central bank that is not printing its currency 

that should be printing its currency to respond to all of that is the 

European Central Bank, which has the weakest economy in the 

globe right now. 

Mr. MULVANEY. And I would love to give Dr. Subramanian the 

opportunity, but it is now the chairman’s prerogative. 

Chairman CAMPBELL. Yes. Again, if Mr. Pittenger would like to 

let you jump in, I will let him do that. But it will be his time starting now. 

Mr. PITTENGER. Sure. Please continue. 

Mr. SUBRAMANIAN. No. I think with Japan we have to get the 

facts a little bit right. The depreciation of the yen began well before 

the announcement of the implementation of QE by Japan. Almost 

all the depreciation happened before Abenomics was actually implemented. That is I think very important to remember. 

Mr. MELTZER. When it was announced. 

Mr. SUBRAMANIAN. When it was announced, yes, but a lot else 

was going on. The Japanese current account deficit was actually— 

the surplus was declining rapidly, and that also contributed after 

the Fukushima disaster. 

I am not saying that QE has not helped lower the Japanese currency. But I think we have to be a little bit careful because the 

truth is the movement in the Japanese yen is a bit of a puzzle for 

most analysts. 

Mr. PITTENGER. Thank you. I would like to just get your thoughts 

regarding Chair Janet Yellen, who was confirmed this week, and 

if you believe that the tapering process will continue or will the 

Fed have other policies? And, frankly, your views on what the Fed 

will be doing over the next year. 

If you would like to begin, Mr. Steil, and go down the row very 

quickly. 

Mr. STEIL. The FOMC minutes would appear to indicate that 

there is a general consensus to move forward with the tapering 

process and that she is not about to make any sort of a sudden 

change in that process. As long as circumstances remain roughly 

what they are today, we can expect the process to continue 

throughout this year. 

Mr. PITTENGER. Thank you. And if you want to recommend any 

additional advice for Ms. Yellen, that would be welcome. 

32 

Dr. Meltzer? 

Mr. MELTZER. My advice would be to stop it now and come up 

with a plan for getting rid of the excess before it does damage. 

Mr. PITTENGER. Yes, sir. Thank you. 

Dr. Lachman? 

Mr. LACHMAN. I would agree with Mr. Steil that basically we will 

get continuation of the policies that we have already seen. I think 

that it has to be condition-based. I am not sure that I would agree 

with Dr. Meltzer that one really wants to unwind too abruptly. I 

think one really has to be doing this by seeing what are the effects, 

how does this impact the economy. One really has to be conditioning one’s policy on the way in which the financial markets 

evolve and the way in which the economy works. And I think that 

being in totally uncharted waters, we really don’t know what the 

impact of the unwinding is going to be. 

Mr. PITTENGER. Dr. Subramanian? 

Mr. SUBRAMANIAN. I have nothing to add. She knows far more 

about monetary policy than I do. 

Mr. PITTENGER. Thank you. I yield back my time. 

Chairman CAMPBELL. All right. The gentleman yields back. 

And so now onto the gentleman from New Mexico, Mr. Pearce, 

for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Dr. Lachman, you got into a little bit of a discussion some time 

ago about the long-term interest rates. And so my question has to 

do with, I may be mixing the concepts, I am not that articulate on 

it, but the maturity extension program has been driving down the 

long-term interest. And that long-term interest is going to go up as 

our economy improves. And so the Federal Reserve at that time is 

going to be faced with increasing costs because they pay banks. So 

their costs are going up at a time that their yields are going down 

because the bond prices are ultimately going to go up. And so this 

program of exchanging long-term for short term and driving longterm rates down looks like it has the potential to create great 

havoc in the Federal Reserve. In 2012, we got $88 billion in profits 

in exchanges and sale of assets and all that junk they did back in 

2008. So what potential do we have for absolute disruption of the 

Federal Reserve’s balance sheet as the economy improves? 

Mr. LACHMAN. I think that if the Federal Reserve balance sheet 

is marked to market, the Federal Reserve would have an enormous 

negative position. The Federal Reserve is holding $4 trillion of 

long-dated assets that they bought at very low interest rates. Obviously, as the interest rate goes up, the value of their bonds goes 

down. They only have something like $50 billion in capital. So they 

are going to really be in a hole were they were to mark to market. 

But as Dr. Meltzer is telling me right now, they are very unlikely 

to mark it to market. 

Mr. MELTZER. They have already said that the mortgage portfolio 

is going to be held as if it were going to be held to maturity. So 

they don’t have to mark it to market under the rules, and that way 

they won’t. Now, there is a slippery question there. The markets 

will mark it to market whether the Federal Reserve does it on its 

balance sheet or not. 

33 

Mr. PEARCE. Any observation, Mr. Subramanian? You don’t want 

to touch that? You have no time for anything like that? Okay. 

I think one of the questions that comes to me, and I am again 

not sure there is a relationship, but we saw significant collapses in 

Iceland and Ireland. And it appeared to be because cheap money 

was coming in, and they were lending far more money than they 

could pay from a fish economy. And so both experienced tremendous difficulties, even to the point that Ireland took on the debt of 

the banks who were all in the process of failing. So now they owe 

9 times their GDP and will never be able to pay that off. And that 

appears to be a result of loose money policy, easy money policies. 

And Mr. Subramanian has said that is one of the great benefits of 

QE3, that emerging economies can get access to capital pretty freely. Is that a correct observation or am I linking things that 

shouldn’t be linked here? 

Mr. Steil, would you care to— 

Mr. STEIL. In the case of Ireland, they experienced a major property and housing boom. 

Mr. PEARCE. Which was caused by easy money, wasn’t it? 

Mr. STEIL. Sure. Nobody questions the fact that monetary policy 

in Ireland, which is set in Frankfurt by the ECB, was too loose. 

But the ECB sets monetary policy for the entire eurozone. So the 

Irish Government was going to have to use other tools to prevent 

overleveraging. 

Mr. PEARCE. Which might cause those days of tears that Mr. 

Meltzer was talking about. Those other tools always strike fear into 

my heart because the people in the know are going to benefit from 

those other tools and the poor schmucks out there on the street 

who save money and put it in the banks hoping that the stability 

that Mr. Meltzer has talked about would actually be there, and as 

we use those other tools I worry about what the effect on the consumers is going to be. 

Mr. Lachman, do you have any comments on any of this? 

Mr. LACHMAN. I just think that the two examples that you used, 

Iceland and Ireland, are the most egregious cases of market discipline breaking down because there was easy money. 

Mr. PEARCE. Yes, unless we use the example of Zimbabwe, which 

began to print their own money and took one of the most stable 

economies in Africa, and now they print trillion dollar notes there. 

So the end result of printing money is not always a good outcome. 

I question whether it is ever a good outcome. 

Thank you, Mr. Chairman. I yield back. 

Chairman CAMPBELL. The gentleman’s time has expired. So I 

will yield myself 5 minutes just for kind of a wrap-up thing here. 

Although the IMF was not the specific purpose directly of this 

hearing, the interchange between two alumnae of the IMF there I 

thought was most—sorry? 

Mr. SUBRAMANIAN. A loyal one and a disloyal one. 

Chairman CAMPBELL. A loyal? Okay. I thought it was rather fascinating. And given that this is a topic of some very much current 

import, I thought I would let the two of you continue this. So where 

we left off, I believe Dr. Lachman’s head was coming off at one of 

Dr. Subramanian’s comments rather than the other way around, 

34 

and saying that what have we come to where money to Greece is 

less stable than Zimbabwe. 

By the way, and Mr. Pearce was talking about it, I do have $20 

billion here from the Reserve Bank of Zimbabwe. So I do have a 

$30 trillion note as well, but it is not with me at the moment because I don’t want to carry that much cash around. I figure carrying $20 billion should be enough. But anyway, since we brought 

up Zimbabwe, I always have this. And by the way, people always 

wonder why. I have used this in speeches many times to point out 

back during the financial crisis in 2008 that our financial system, 

the value of money is all based on trust and what stands behind 

it. And when that trust goes away, the value goes away, and that 

as it happened with this, it can happen with any currency if not 

properly managed. 

So with that, Dr. Lachman? 

Mr. LACHMAN. I think where I would agree with Dr. 

Subramanian is that the IMF in the past has loaned to countries 

with as bad a credit standing as the countries in the European economic periphery. Where I disagree is that the IMF, in the case of 

Russia or Argentina or all the other countries that they might have 

lent to in the past, they never lent to those countries on the scale 

that they are lending now to the European countries. 

So if you look, for instance, at Greece right now, Greece has debt 

that is 175 percent of its gross domestic product. That is huge. 

Most of that debt is owed to the official sector. And the chances are 

is that debt is going to have to be written down. 

Somebody is going to have to take a hit. It is going to be either 

the ECB or the IMF or the European Commission. But that debt 

in the end is not going to be repaid, or it is going to be termed out 

or very low interest rate. So the basic point that I am making is 

that the lending that we have seen to the European periphery has 

never been on that scale before either in terms of the IMF’s quotas, 

in terms of the amount of GDP this represents, or in terms of the 

amount of fiscal revenues. So the IMF is really taking very high 

risks that it hasn’t taken before. 

Chairman CAMPBELL. Dr. Subramanian? 

Mr. SUBRAMANIAN. I agree with Dr. Lachman that the scale is 

different now. But I am far more sanguine about the prospects of 

this being repaid, one. And two, even in the extreme case were it 

not to be paid, it would not make a dent in the IMF because, for 

example, I think the IMF has senior creditor status. It would be 

paid off first before anyone else. And second, again, if things go 

really bad, the IMF has $130 billion of gold against which it can 

fill any hole of any magnitude that we can currently imagine. So, 

investing in the IMF is not a risky proposition. 

Mr. MELTZER. May I add to that? One of the things that the IMF 

did, was famous for, was it imposed very strict conditions on the 

countries to which it lent. It isn’t doing that anymore. The so-called 

austerity which creates such excitement in the European press is 

a farce. There hasn’t been any big expenditure cuts. The expenditure cuts have almost all been investment, which is a short-run 

strategy, or tax increases, which is a very bad strategy in a recession. They haven’t cut spending. 

35 

Chairman CAMPBELL. If I can cut you off, Doctor, because Dr. 

Steil wanted to jump in, and I want to give him the last 30 seconds. 

Mr. STEIL. Historically countries have tended to default right as 

they begin to achieve what is called a primary budget surplus. 

That is when they no longer need to borrow money from the markets in order to fund current expenditure. Greece is precisely entering into that position this year. They will achieve a primary budget 

surplus, at which point they have every incentive to default because they no longer need the markets to fund their current expenditures. So you can expect more conflict this year between 

Greece and its official sector lenders. 

Chairman CAMPBELL. Thank you. My time has expired. And we 

have been joined by the ranking member of the full committee, the 

gentlelady from California, Ms. Waters. And Ms. Waters is recognized for 5 minutes. 

Ms. WATERS. Thank you very much, Mr. Campbell, for sitting 

here and doing this work without the help of this side of the aisle 

this morning. 

I, unfortunately, could not be here early to join with my colleagues and Mr. Clay, who is our ranking member, but this is a 

most important subject matter, and I certainly wanted to see if I 

could catch up. 

I certainly have an opening statement that I would like to 

present for the record, so if you would accept that. 

Chairman CAMPBELL. Without objection, it is so ordered. 

Ms. WATERS. Let me raise a question. This is for Dr. 

Subramanian. Is that your name? 

Mr. SUBRAMANIAN. That is my name, yes. 

Ms. WATERS. Okay. Given the unique role of the dollar as the 

world’s reserve currency and the fact that the United States is the 

world’s largest economy, how much responsibility does the Fed 

have to consider the spillover effects associated with these policies? 

How should we reconcile or rationalize actions that create benefits 

to the United States but risks abroad? 

Mr. SUBRAMANIAN. I think, as the world’s biggest economy, the 

financial epicenter and the issuer of the dollar, it has to be mindful 

of its international consequences. Its primary responsibility is to 

the U.S. economy, but it has to be mindful of its international consequences. 

And, in fact, the Fed has tried to do precisely that, as I said in 

my written testimony. And the way it has tried to do that is of 

course by following policies which it considers important for its own 

economy but taking actions, for example, like providing these dollar 

liquidity swaps to countries in trouble to forestall the risks associated with crises. For example, it has lent money to the central 

bank swap lines for emerging-market countries and most recently 

in Europe, as well. And this lending, in fact, has had a positive impact on the economy. 

So it is a delicate task because no one will say the Fed is responsible for running the economies or creating incentives for good behavior elsewhere, but, equally, it has to be mindful. And I think 

it has done a pretty good job of balancing these twin responsibilities. 

36 

Ms. WATERS. Thank you very much. 

Upon entering here today, my staff was anxious to share with me 

Mr. Meltzer’s recommendation to close the World Bank. And I 

guess the reason that was given is there is little reason for it in 

a world of enormous capital flows. Is that correct? 

Mr. MELTZER. Correct. 

Ms. WATERS. This brings up an important question with regard 

to the legitimacy of development finance as distinct from commercial finance. 

In our view, development finance has not been rendered obsolete 

by the emergence of the financial markets. In fact, it is just the opposite. We have had over 30 years of experience with the financial 

markets which has given us the debt crisis of the 1980s in Latin 

America, the 1997 East Asia crisis, the 1998 Brazil and Russian 

crisis, and the 2008 financial crisis. 

The accessibility of countries to private capital can be cut off 

very, very rapidly. As soon as a crisis arises, the money dries up. 

So can you expound a little bit, or can any of the other witnesses 

share their views on the role of development finance as distinct? 

Mr. MELTZER. Yes. You just described why it is that I wanted to 

end the World Bank but not the IMF. If there is a crisis, that is 

the responsibility of the IMF. Long-term lending, that is the responsibility of the World Bank. 

We don’t need the World Bank to do long-term lending. We did 

back in 1945 when we started because there was very little international capital, practically none. But we now have trillions of dollars floating from country to country, so it is just—so we have succeeded with the policy that we had. It is time to say that, in terms 

of our domestic policy, we have many, many more urgent problems 

at home than we do in Argentina or Zimbabwe. 

Ms. WATERS. Of course, we would all agree that what we do domestically must come first. But we also must agree that we live in 

a world where it is very connected and we have to be concerned 

about what goes on around the world, and we are considered the 

leaders, and that we cannot absence ourselves from that leadership 

role. 

And so, do you see us absolutely not being involved at all with 

the World Bank? 

Mr. MELTZER. I think the World Bank has succeeded in doing a 

lot of things around the world, many of them very good— 

Ms. WATERS. Will it help to avoid crises? 

Mr. MELTZER. They are not supposed to be involved in avoiding 

crises. The Congress appointed me the chairman of a commission 

to look into what they do. They don’t work on crises; they work on 

longer-term development. Longer-term development is financed by 

longer-term capital, and we have lots of that around. So we just— 

we should declare success. 

Mr. SUBRAMANIAN. Can I say— 

Ms. WATERS. Mr. Chairman? 

Chairman CAMPBELL. Yes. Without objection, I will yield the 

gentlelady from California another 5 minutes, since she just got 

here. 

Ms. WATERS. Thank you. 

Chairman CAMPBELL. Please proceed. 

37 

Ms. WATERS. Yes. Let me just say to Mr. Meltzer that when I 

referred to the avoidance of crises, I was not talking about a crisis 

occurring and then jumping in. I was talking about long-term development helps to avoid crises. 

I want to now go to Mr. Subramanian. 

Mr. SUBRAMANIAN. Thank you. 

I think one way to think about development finance and to kind 

of bring the two of you closer together, between outright abolition 

and continuation with the status quo is to think of it in the following way: that I think where Professor Meltzer is correct is that, 

as countries have grown, as commercial finance has become more 

important, the reliance on development finance should naturally— 

Ms. WATERS. Sure. 

Mr. SUBRAMANIAN. —decline over time. It hasn’t disappeared altogether because there are still places in the world which require 

development finance, so you need the World Bank for that. 

But I think the other very important point that we have to remember, where I disagree with Professor Meltzer, is that there are 

some forms of development finance, especially which go towards 

global public goods, which markets will never finance. So the World 

Bank still will have to finance a lot of global public goods: one, research and development on diseases, on climate change, and on agriculture, one. 

And so, there are lots of global public goods that still need to be 

funded, and development finance has an important role to play 

there. 

Ms. WATERS. That is interesting. 

Would Mr. Meltzer agree with that? 

Mr. MELTZER. They don’t do it. That is not what they do. 

We had malaria. Malaria is a wonderful example, because for 

years—and there is a lot of literature on this—they wouldn’t even 

provide bed nets. Now, how did we finally make some progress 

against malaria? The Gates Foundation and various other entities 

supplied the public goods, spent money to do drug research on malaria drugs. That is private-sector work, which is much more effective. The World Bank didn’t do that. Unfortunately, it didn’t do 

that. 

The World Bank has—our ideal should be to try to improve the 

allocation of capital. As I look at the United States, it needs a lot 

more capital. 

Ms. WATERS. Since we have such a good debate going on, we 

should just continue it. 

Mr. Subramanian just made a good case for the private sector’s 

involvement and what they have been able to do in areas that were 

not done by the World Bank. 

Mr. SUBRAMANIAN. I heard Professor Meltzer saying that the 

problem was not that the objective of financing public goods was 

unimportant, in fact he stressed importance, just that the World 

Bank should be doing more of that. 

Ms. WATERS. Yes. 

Mr. SUBRAMANIAN. And I think that is where we need reforms 

of the World Bank to push the World Bank much more in that direction and do perhaps a little less of the old-style, conventional development financing and do more of the global public good. But 

38 

that is something that Congress and other countries around the 

world should push the World Bank in that direction. 

Ms. WATERS. So what you are basically saying is, rather than 

getting rid of the World Bank and thinking that we don’t need it 

anymore, we should be using whatever public policy influence we 

have to direct it toward doing the kinds of things that make good 

sense at this point in time. 

Mr. SUBRAMANIAN. Exactly. 

Ms. WATERS. I am not going to ask Mr. Meltzer if he agrees with 

that. I am simply going to thank both of you for your insight and 

your wisdom. 

And I yield back the balance of my time. 

Chairman CAMPBELL. I thank the ranking member. 

And I would like to thank all of the witnesses for your testimony 

today. I hope everyone found this as valuable as I did. 

Without objection, your written statements will be made a part 

of the record. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And, with that, without objection, this hearing is now adjourned. 

Thank you. 

[Whereupon, at 12:10 p.m., the hearing was adjourned.] 

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A P P E N D I X 

January 9, 2014 

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