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RETHINKING THE FEDERAL RESERVE’S 

MANY MANDATES ON ITS 

100-YEAR ANNIVERSARY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

DECEMBER 12, 2013 

Printed for the use of the Committee on Financial Services 

Serial No. 113–56 

( 

(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) 

C O N T E N T S 

Page 

Hearing held on: 

December 12, 2013 ........................................................................................... 1 

Appendix: 

December 12, 2013 ........................................................................................... 37 

WITNESSES 

THURSDAY, DECEMBER 12, 2013 

Goodfriend, Marvin, Friends of Allan Meltzer Professor of Economics, Tepper 

School of Business, Carnegie-Mellon University ............................................... 11 

Holtz-Eakin, Douglas, President, the American Action Forum ........................... 10 

Peirce, Hester, Senior Research Fellow, Mercatus Center, George Mason University ................................................................................................................... 15 

Rivlin, Hon. Alice M., Senior Fellow, Brookings Institution ................................ 13 

APPENDIX 

Prepared statements: 

Goodfriend, Marvin .......................................................................................... 38 

Holtz-Eakin, Douglas ....................................................................................... 48 

Peirce, Hester .................................................................................................... 59 

Rivlin, Hon. Alice M. ........................................................................................ 65 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hensarling, Hon. Jeb: 

Written statement of Alex J. Pollock, Resident Fellow, the American 

Enterprise Institute ...................................................................................... 68 

(1) 

RETHINKING THE FEDERAL RESERVE’S 

MANY MANDATES ON ITS 

100-YEAR ANNIVERSARY 

Thursday, December 12, 2013 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 3:08 p.m., in room 

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

Members present: Representatives Hensarling, Garrett, 

McHenry, Campbell, Posey, Luetkemeyer, Huizenga, Stivers, 

Stutzman, Mulvaney, Hultgren, Pittenger, Barr, Cotton, Rothfus; 

Waters, Maloney, Watt, Sherman, Capuano, Clay, Scott, Green, 

Himes, Carney, and Sinema. 

Chairman HENSARLING. The committee will come to order. Without objection, the Chair is authorized to declare a recess of the 

committee at any time. 

I, first, want to thank the panelists for their patience and indulgence on our rescheduling. The committee is most appreciative. 

Before getting to our opening statements and testimony, I am 

going to recognized myself to speak out of order for 1 minute. I am 

going to recognize the ranking member and one other member, and 

then the rest of you are out of luck. 

On Tuesday night, Mel Watt, the Congressman of the 12th Congressional District of North Carolina, and an 11-term Member of 

the United States House of Representatives, was confirmed by the 

United States Senate to be the next Director of the Federal Housing Finance Administration (FHFA). Since coming to this committee, I have known Mel Watt to be a man of honor. A senior 

leader on this committee, he has served with distinction and led on 

many critical issues. 

At the time that he was confirmed, I sent out a release, and 

somebody Twittered to the committee that they were surprised I 

was saying something nice about Mel Watt. And I am still trying 

to figure out if that was a comment upon me or Mr. Watt. 

[laughter] 

It is a long journey from Mecklenburg County, North Carolina, 

to Yale, and a long journey from Mecklenburg County to Congress. 

Fortunately, it is a short distance from Congress to the FHFA; I 

am told it is 5/8th of one mile. Thank you, MapQuest. 

I do not know the exact timing of our colleague’s departure. This 

may be his last hearing as inquisitor. I will assure the gentleman 

2 

from North Carolina that it will not be your last hearing as 

inquisitee. 

But on behalf of the Republican side of the aisle, and on behalf 

of the entire committee, I wish to congratulate you, and we look 

forward to continuing to work with you. 

And for all the other members, I have spoken to the ranking 

member, and after we return from our Christmas break, we will 

have a reception so that our colleague can be sufficiently hosted, 

toasted, and roasted. 

With that, I am happy to recognize the ranking member for 1 

minute out of order. 

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

I certainly appreciate your comments. And I would like the committee to know that you have been supportive in your own way and 

in your own style, and that your offer to have a bipartisan reception, with all of us participating, in order to wish our friend and 

colleague a farewell to this committee and to congratulate him is 

something that you initiated. And I appreciate that. I appreciate 

that very much. 

As a matter of fact, we have been talking about more bipartisan 

receptions. We talked about it for perhaps Christmas. I said, ‘‘Oh, 

I don’t know if we want to do that.’’ But when you said for Mel, 

right away I said yes. 

And so, Mr. Chairman, it is with a heavy heart and a strong 

sense of pride that I congratulate my dear friend, Mel Watt, on his 

confirmation as Director of the Federal Housing Finance Agency. 

For more than 2 decades, I have served alongside Mel on this 

committee, and I have watched him use his knowledge and experience on real estate issues and housing issues to earn the respect 

of colleagues on both sides of the aisle. And I am very pleased to 

say that Mel Watt understood what was going on with predatory 

lending and securitizing and packaging and all of that long before 

most Members really got in touch with those issues. 

Because of his leadership, we were able to follow and to build on 

what he had initiated so that we could get to the issues of understanding what was happening in the housing market and how we 

should address some of those issues. So his experience that he 

brought to this committee was considerable, again, working on real 

estate issues and housing issues. 

Mel is a thoughtful, well-informed, principled, and fair human 

being. These qualities, and his well-known temperament, will serve 

him well as he works to address some of the most important challenges facing our economy and our housing market. 

His reputation as a legislator focused on openness, collaboration, 

and good public policy is second to none. Over his distinguished career, he has demonstrated an unwavering commitment to protecting consumers, expanding affordable rental housing, and providing prudent oversight of financial institutions. I know these values will be embodied in Director Watt’s leadership of the FHFA. 

Today, I am sad to say goodbye to a long-time friend and collaborator, but I am heartened to know that in Director Mel Watt, this 

committee and this Nation will have a strong partner in one of its 

most important government agencies. 

3 

Let me just say that I learned from Barney Frank that when you 

have difficult issues which require that someone who is smart, who 

is patient, and who is not only knowledgeable, but willing to listen 

to both sides, when you have someone like that you can go and ask 

to put both sides together and work out a solution, then you should 

certainly avail yourself of that person’s expertise. 

That is what Barney Frank did with Mel Watt. He often asked 

Mel Watt to get in the middle of some of the toughest issues and 

work with both sides, all sides of those issues, and bring us back 

a solution. 

And so, we are going to miss those qualities in Mel, but we look 

forward to working with him, because I sincerely believe that in 

this new position he will help us to understand where we need to 

go and what we need to do on the great issues confronting us on 

housing in particular today. 

So with that, Mel, congratulations. 

[applause] 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from North Carolina for one of the last times, for 1 minute of rebuttal. 

[laughter] 

Mr. WATT. Thank you. Thank you. 

Thank you, Mr. Chairman, and thanks to you and Ranking Member Waters, both friends and colleagues on this committee. 

I will be very brief because I am delighted to know you all are 

inviting me back to host me and roast me before I get to sit on the 

other side of the table and you really get to go after me. So, I am 

sure today is a lot more pleasant than it will be sitting on the other 

side of the table when I come back. 

I would just make one comment to put this in perspective, because one of the things you have to recognize about our country 

and be reminded of quite often is that only in America could somebody be confirmed to this position that has the regulatory authority 

over the bulk of housing in this country, only in America could 

somebody come from a beginning, being born in a house with no 

running water, no electricity, a tin roof where you could look up 

through it and see the sky at night, and look down through the 

wooden floor and see the ground, and have the opportunity to get 

an education, to practice law, and gain experience in some of the 

most complex real estate issues that the country faces, to come to 

Congress and serve on this committee, and serve with wonderful 

people like my colleagues on this committee have been over the 

years. 

Only in America can that happen. That is the great thing about 

our country, and we have to keep faith in that process. So, I thank 

you for your kind comments, and I look forward to coming back to 

visit with you. And I hope you all will be as kind to me when I 

come back as you have been today. 

Chairman HENSARLING. Don’t count on it. 

[laughter] 

And the gentleman yields back. 

[applause] 

I thank the panelists yet again for their continued indulgence. 

4 

Now returning to regular order, I recognize myself for 5 minutes 

to give an opening statement. 

This month marks the 100th anniversary of the Federal Reserve 

Act. It is on this occasion that I announce the House Committee 

on Financial Service’s Federal Reserve Centennial Oversight 

Project. Our committee will overtake the most rigorous examination of the Fed’s purposes, policies, and track record in its history. 

At the end of the project, scheduled for next fall, the committee 

stands prepared to mark up legislation to reform the Federal Reserve, based upon its findings. 

The Fed was created in response to the financial panic of 1907. 

An American Banker article argued at the time, ‘‘The financial disorders that have marked the history of the past generation will 

pass away forever.’’ The Comptroller of the Currency at the time 

said, ‘‘Financial and commercial crises or panics seem to be mathematically impossible.’’ 

Clearly, these predictions proved to be somewhat overly optimistic, as well-established by economists Milton Friedman and 

Anna Schwartz, and economist Chairman Ben Bernanke, that the 

Fed played a significant role in bringing about the Great Depression. Loose monetary policy, coordinated with fiscal deficits, helped 

cause the great inflation of 1965 to 1986, in which inflation rates 

exceeded 13 percent. 

Most economists will argue that loose monetary policy between 

2003 and 2005 contributed to the housing bubble in our most recent financial crisis. This history is not meant to be an indictment 

of the Fed, but is intended in the spirit of looking behind the curtain, not unlike the Wizard of Oz, to discover a human face, a 

human face capable of making mistakes, mistakes sometimes with 

dire consequences for the lives of millions of Americans. 

Not only were the authors of the Federal Reserve Act wrong 

about its effectiveness, I do not believe they would recognize today’s central bank. Classic central bankers followed Bagehot’s dictum to lend freely during panics to solvent banks at a penalty rate 

and against good collateral. Recently, the Fed has lent freely to insolvent non-banks at subpenalty rates against questionable collateral. To paraphrase an old automobile advertising phrase, ‘‘This is 

not your father’s Fed.’’ 

The Fed’s foray into credit allocation policy, distinct from monetary policy, was not confined to the immediate events of 2008, but 

continues to this day in the Fed’s unprecedented purchase of mortgage-backed securities. The Fed’s additional extraordinary purchases of Treasury bonds have supported the Obama Administration’s trillion-dollar deficits, a threat to the Fed’s independence, 

and one that in prior decades has been a harbinger of runaway inflation. 

These extraordinary powers rest with a creature of government 

that the founders of our republic, who have vested the authority to 

coin money with the Congress, would not have envisioned: a publicprivate entity exempt from budgetary appropriation with effective 

control over much of the economy. 

Our first hearing will consider many mandates of the Federal Reserve, including classic monetary policy, prudential regulatory polVerDate Nov 24 2008 18:20 May 30, 2014 Jkt 086691 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\86691.TXT TERRI
5 

icy, full employment, systemic risk regulator, lender of last resort, 

and effective financier of our unsustainable debt. 

We will also consider the Fed’s role in credit allocation, arguably 

picking winners and losers, particularly the burdens this has 

placed—low interest rates have placed on fixed-income seniors. 

We will ask questions again about the Fed’s role in our 

unsustainable debt. While most of us maintain our commitment to 

permit the U.S. Government Accountability Office (GAO) to audit 

the Fed’s operations, we will explore the issues of independence, accountability, and transparency, since rarely has an agency of government been given or assumed greater discretionary power over 

the economy than the Federal Reserve. 

We will consider how other financial market regulators operate 

under a statutory requirement to measure the cost of the new rules 

on the economy against the benefits, so we will help ensure that 

new rules do not violate the Hippocratic Oath principle to first do 

no harm. 

The Fed’s role as lender of last resort has expanded over the last 

few decades and remains ill-defined. We will consider the appropriate boundaries of that emergency power. We will certainly consider the classic debate in monetary policy between rules and discretion in monetary policy. Many would argue that in successful 

periods in the Fed’s history, like the great moderation of 1987 to 

2003, the Fed appears to follow a clear rule. In 1995, then-Fed 

Governor Janet Yellen described the Taylor Rule as ‘‘what sensible 

central banks do.’’ 

Milton Friedman once said that, ‘‘Money is much too serious a 

matter to be left to central bankers. None of us are infallible.’’ I respect the dedicated men and women who lead the Federal Reserve, 

but we have a responsibility to ensure that the Federal Reserve effectively meets whatever mandates it may have. 

The Chair now recognizes the ranking member for 5 minutes. 

Ms. WATERS. Thank you, Chairman Hensarling, for holding today’s hearing to discuss the mandates of the Federal Reserve on its 

100th anniversary. 

At a critical inflection point such as this, it is important to take 

stock of the lessons of the past and reflect on whether the Fed has 

been effective in meeting its charge to keep inflation in check, financial markets stable, and maximize employment. 

Although there have been ups and downs in its history, the Federal Reserve has learned from the lessons of the past. Today, it 

plays an important role in fostering the conditions necessary for 

both stability and growth in the American economy. 

One of the many truths over the last century that holds today 

is the interdependency between a stable economy and a stable financial system and, in this sense, the Fed’s mandate to reduce systemic risk and promote financial stability complements its monetary objectives. 

The Fed’s regulatory shortcomings in the years prior to the most 

recent financial crisis were significant. But since the crisis began, 

the Federal Reserve has been one of the most effective policymaking bodies in stabilizing the financial sector and continuing to 

support the recovery. 

6 

When the first signs of this crisis emerged in 2007, the Fed responded swiftly to address the weak economy. It cut the discount 

rate, extended credit to banks, and brought the Federal funds rate 

to its lower bound. When this wasn’t enough, the Fed took extraordinary steps to provide emergency liquidity directly to institutions 

and foreign central banks around the globe. 

However, the severe nature of the crisis forced the Fed to enter 

uncharted territory, recognizing the need to act. It took unprecedented steps by engaging in large-scale asset purchases—a policy 

known as quantitative easing—which lowered long-term interest 

rates and has provided a needed boost to our recovery. 

As a result of the Fed’s stimulus, economists estimate that the 

economy is 3 million jobs stronger than it would have been without 

the Fed’s courageous efforts. Further, the drop in interest rates 

triggered by quantitative easing has spurred improvements in the 

housing sector and, by extension, the larger economy. 

This housing recovery has been accompanied by a rise in home 

prices that has reduced the number of borrowers who are underwater on their mortgages, and expanded the pool of homeowners 

who are eligible to refinance. While the economic outlook for our 

Nation continues to improve, we still have a long way to go until 

we can say that maximum employment has been achieved and the 

economy has fully recovered from the trauma of the financial crisis. 

With close to 11 million Americans still out of work, it is astonishing to me that members of this body would even consider striking the employment aspect of the Fed’s dual mandate. What kind 

of signal does this send to hardworking Americans across the country? 

Of course, Congress should do its part, too. I am hopeful that 

Members will come together to pass a budget that moves away 

from the antigrowth austerity policies enshrined by the sequester 

in favor of a responsible budget that puts our long-term spending 

on a sustainable path. 

Mr. Chairman, I believe it is worth noting that before we contemplate legislative changes to the Fed or its mandate, Congress 

should allow the Fed to finalize the important reforms included in 

the Dodd-Frank Act that reduce the likelihood of future financial 

crisis. 

The Fed is making important progress on this front. Just this 

week, the Fed approved the final Volcker Rule, a critical rule which 

will make our financial system safer. We should not rush into reform merely for the sake of doing so. 

So I look forward to the discussion, and again, this hearing, and 

I thank the chairman for scheduling today’s hearing. I yield back. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from California, Mr. 

Campbell, the chairman of our Monetary Policy and Trade Subcommittee, for 3 minutes. 

Mr. CAMPBELL. That is fine. Thank you, Mr. Chairman. 

So we are talking about the many mandates of the Federal Reserve today. And those mandates have not ever been thus, as we 

are doing a little history lesson here. The original architects of the 

Fed had simple goals, like managing an elastic currency and serving as a lender of last resort. It wasn’t until 1977, many decades 

7 

after the creation of the Fed, that it received the additional mandates of maximum employment, stable prices, and moderate longterm interest rates. The first two are commonly referred to as the 

‘‘dual mandate,’’ although there are more than that. 

But since then, other responsibilities have been added or increased. The Federal Reserve now has explicit responsibilities in 

regulating commercial banking activity, conducting macroeconomic 

surveillance, even serving as the funding source for the Consumer 

Financial Protection Bureau (CFPB). 

It has served other implicit roles, as well, such as providing indirect support to mortgage finance markets and lowering borrowing 

costs for the Federal Government, which have had direct impacts 

on house prices and have enabled deficit spending. 

So with all of these mandates and responsibilities, whether they 

are implicit or explicit, that have been piled onto the Federal Reserve in the last few decades, the question we are asking here, that 

we must ask ourselves is, can the Federal Reserve do as much as 

it is being asked to do, as well as we expect it to do it? 

The primary job of a central bank—to monitor the money supply 

and monetary policy—is tough enough and has enough impacts on 

the economy. When we have all of these other things out there, and 

mandates for this and mandates for that, are we giving the Fed 

more than it can handle effectively, or are we not? 

These are some of the questions that, over the period of the next 

few months, as we do this—what did you call it, Mr. Chairman, 

centennial review of the Fed—we want to get to, but we certainly 

are starting today, right now, with you all in trying to understand 

your different views on the mandates that are there, whether they 

are correct, whether they are implicit or explicit, and whether they 

should be revised. 

The Federal Reserve, as I have said several times in the last few 

days and will continue to say, is independent, but it is not unaccountable. And part of what we are talking about here is accountability for the Fed and its functions and its actions. 

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

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Clay, the ranking member of the Monetary Policy and Trade Subcommittee, for 3 minutes. 

Mr. CLAY. Thank you, Mr. Chairman, especially for holding this 

hearing regarding the Federal Reserve’s mandate. As we know, in 

1913 Congress enacted the Federal Reserve Act to provide for the 

establishment of the Federal Reserve Bank. 

In 1977, Congress amended the Federal Reserve Act to promote 

price stability and full employment. This amendment is better 

known as the Humphrey-Hawkins Act. Price stability is viewed as 

stable with low inflation, and full employment is viewed as maximum sustainable employment. 

The Federal Reserve’s dual mandate is in contrast to the European Central Bank’s (ECB’s) single mandate. The ECB’s single 

mandate of price stability is a primary objective of their monetary 

policy. 

The Consumer Price Index (CPI) produces monthly data on 

changes in the prices paid by consumers for goods and services. 

8 

Currently, the U.S. CPI decreased 0.1 percent in October on a seasonally-adjusted basis. 

For the past year, all-items index increased 1 percent before seasonal adjustment. Gasoline fell 2.9 percent in October, and that led 

to a decline in the entire index. The electricity index rose, but the 

indexes for fuel oil and natural gas declined. 

From the mid-1960s to the mid-1980s, the CPI showed major 

swings in inflation from low to high to low, and an unemployment 

rate reaching 11 percent. The economy went through many recessions during that time, with both high inflation and high unemployment. 

Currently, the U.S. unemployment rate stands at 7 percent. In 

Europe, the unemployment rate in several nations is as high as 27 

percent. In other nations, the unemployment rate is 15 percent and 

above. The euro area is around 12 percent and E.U.–27 is around 

11 percent. 

Still, there are some people who believe that the United States 

would be better off with a single mandate as opposed to a dual 

mandate. They believe that monetary policy can achieve the same 

outcomes with a single mandate as it can with a dual mandate, 

and I certainly do not agree with that analysis. 

Mr. Chairman, thank you. I look forward to the witnesses’ comments. I yield back. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, the vice chairman of the Monetary Policy and Trade 

Subcommittee, for 2 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. And I appreciate that. 

I, too, much like my previous colleagues have talked about, the 

Humphrey-Hawkins Act, the dual or multiple mandate that has 

been laid out, I think it is worthy to explore to what goal and what 

end we are utilizing that. 

I have an economist friend back in Michigan who is from Chicago, Dr. Robert Genetski, who—he and I have had some interesting conversations about the Fed. He has pointed out that over 

the last 5 years, there has been about $2.3 trillion of reserves that 

have been built up in the Fed over the last 5 years. He points to 

the fact that the Fed is offering 0.25 percent of interest, while 

Treasuries are at basically zero. It is not a hard decision for some 

of these banks as they are going in there. He believes that it has 

destroyed liquidity, as well. And I am inclined to agree with him. 

I would love to hear that from you all. 

But as we are looking at quantitative easing, QE1,–2,–3,–infinity, whatever may be happening, Operation Twist, it certainly 

seems to me that we are outside the bounds of not only where traditionally the Fed had been, but maybe where it should be and legally should be. And how you put that toothpaste back in the tube 

is something that has not been clear, and it is all theoretical, as 

Mr. Bernanke had pointed out here in this committee room. 

Earlier today, we had a hearing with Treasury Secretary Lew, 

where a couple of my colleagues, fellow colleagues from Michigan, 

talked about the effects of Japan, and their quantitative easing, 

and their ‘‘currency manipulation’’ they are under. 

9 

They believe that should exclude Japan from the Trans Pacific 

Partnership (TPP) discussions that are going on because of, literally, the quantitative easing that Japan has been doing to make 

the yen cheaper, and therefore, Japanese products cheaper. I would 

like some reflections on how that shouldn’t apply to us, and what 

our own Fed has been doing. 

So, thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman, for 2 minutes. 

Mr. SHERMAN. This comatose economy still needs stimulus. Monetary stimulus reduces the Federal deficit by reducing borrowing 

costs of the Federal Government. Fiscal stimulus, which is, in 

many ways, the alternative, increases the Federal deficit. A 2 percent target inflation rate is reasonable, especially given the disaster that can occur to our economy if we have deflation. Look at 

Japan or look at our own Great Depression. 

Another part of the dual mandate is the dual function that the 

Fed has: on the one hand, it is a bank regulator; and on the other 

hand, it is a monetary policy-setting body. I hope our witnesses address that part of the dual mandate dealing with both unemployment and inflation. 

We also have the Fed dual governance, where, on the one hand, 

it is a Federal Government agency, appointed through a democratic 

government. And on the other hand, its regional executives are appointed, in part, by banks. One bank, one voter, actually, $1 billion 

of banking, one vote, which is not democracy. And given the tremendous governmental power the Fed has, should all of its Board 

Members be Presidentially appointed for whatever terms are reasonable? 

I hope we look at Section 13(3), which remains the most dangerous economic provision in our statute books. It allows unlimited 

lending by the Fed, trillions of dollars at times. And we at least 

ought to make sure that those loans are default-risk-free, or as 

close to that as they can achieve. 

And finally, when it comes to auditing the Fed, as an old CPA, 

I will just say that given our limited auditing resources, we would 

normally want to direct them, first, to whichever agency a Federal 

Government is working hardest to avoid being audited. 

So I look forward to these hearings, looking not at just one controversial issue of inflation versus unemployment, as a focus of the 

Fed’s policy, but a broader range of issues, as well. 

I yield back. 

Chairman HENSARLING. Today, we welcome four witnesses to our 

panel. 

Dr. Douglas Holtz-Eakin is the president of the American Action 

Forum. Dr. Holtz-Eakin has a distinguished career in the economics field in academia and, like another one of our witnesses, Dr. 

Rivlin, also served as a former Director of the Congressional Budget Office. He earned his Ph.D. from Princeton, and his undergraduate degree from Denison University. 

Dr. Marvin Goodfriend holds the Friends of Allan Meltzer Professorship as a professor of economics at Carnegie Mellon’s Tepper 

School of Business in Pittsburgh. He has previously served on the 

10 

Economic Advisory and Monetary Policy panels of the New York 

Fed. He received his Ph.D. from Brown University, and his undergraduate degree from Union College. 

Dr. Alice Rivlin is currently a senior fellow in economic studies 

at the Brookings Institution, a visiting professor at the Public Policy Institute at Georgetown, and the director of the Engelberg Center for Health Care Reform. As most of us know, she, too, has a 

distinguished public service career, including service, along with 

myself, on the President’s debt commission, also known as Simpson-Bowles. Somehow, she managed to dodge the bullet on the 

super-committee; I did not. 

She also served as the Founding Director of the Congressional 

Budget Office, OMB Director, and as Vice Chair of the Federal Reserve Board. She earned her Ph.D. at Harvard, and her undergraduate degree at Bryn Mawr College. 

Last, but not least, Hester Peirce is a senior research fellow at 

the Mercatus Center at George Mason University. Her primary research interests relate to the regulation of financial markets. We 

welcome her back to the Hill. Ms. Peirce formerly served on the 

Senate Banking Committee. She earned her law degree at Yale, 

and her undergraduate degree from Case Western Reserve University. 

I think each and every one of you have testified before, so you 

know that you will each be recognized for 5 minutes. And, no 

doubt, you know the lighting system. Without objection, each of 

your written statements will be made a part of the record. 

Dr. Holtz-Eakin, you are now recognized for 5 minutes. 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, THE 

AMERICAN ACTION FORUM 

Mr. HOLTZ-EAKIN. Thank you, Mr. Chairman, Ranking Member, 

and members of the committee. It is a privilege to be here today. 

Certainly, I want to applaud the chairman and the committee for 

holding this series of hearings. The 100th anniversary of the Federal Reserve is an appropriate time for a comprehensive review. 

And it is especially timely, because since 2007, the Fed has navigated unprecedented and extraordinary events and undertaken unprecedented and extraordinary measures in response to those 

events. It would be useful to have a systematic evaluation of their 

efficacy and their desirability as future tools for the Federal Reserve under the purview of the Congress. 

My written testimony points out four major functions for the 

Federal Reserve: the conduct of monetary policy; acting as a lender 

of last resort; microprudential regulation, the oversight of bankholding companies, in particular; and macroprudential regulation, 

the management of systemic risks. And I think there is fruitful 

area of inquiry for all four. 

Probably the most familiar is the debate over the conduct of monetary policy, rule-based monetary policy versus discretion, the desirability of a single mandate versus a dual mandate. I won’t belabor those here. I simply encourage the committee to look into 

that. 

I do think that the lender-of-last-resort function needs some examination. I was privileged to serve under appointment from the 

11 

Congress on the Financial Crisis Inquiry Commission. That experience left me with the very strong belief that the Federal Reserve 

was the single best policy response to the crisis and deserves the 

lion’s share of the credit for the relatively quick turnaround that 

the United States experienced in response to the downturn in financial markets. 

And that involves a traditional and large-scale lending of liquidity against collateral. I am not a big fan of the things they have 

done since. I will go into that later, but I think in that moment, 

it did an extraordinary job for the United States. 

But it left behind as a legacy some serious questions about the 

transparency of their actions. It left behind an extraordinary expansion of the balance sheet, which is exposed to interest rate 

risks, and may constrain further Federal Reserve policy. And I 

think it is a useful thing for the committee to look at where the 

limits should be on the lending of last resort and what serves as 

useful collateral. I will confess that I don’t have a firm answer to 

that question, but I think it is something that is certainly worth 

investigating and thinking hard about. 

In the area of microprudential regulations, the Fed has a very 

extensive supervision of regime. It had one leading into the crisis, 

and it missed some material weaknesses in the bank holding companies under its supervision. And I think it has, since that time, 

been given even greater supervision obligations. 

For example, the Volcker Rule that was just announced looks to 

me to be an extraordinary undertaking, one that is ambiguous, at 

best, and is going to strain the abilities of supervisors. I think it 

really is a good question as to whether we are asking too much of 

the Fed in that area. 

And then finally, on the macroprudential, the systemic risk 

issue—with the finance—the FSOC and the Fed’s role in the 

FSOC, and worrying about systemic risk, I worry about whether 

we have gone too far. I look at the FSOC’s designation of life insurance companies, for example, as systemically important financial 

institutions (SIFIs), when they have little or nothing to do with the 

crisis that we experienced, and I think perhaps we have drawn the 

boundaries too widely and it might be time to rein in the 

macroprudential regulatory obligations and authorities of the Fed 

and others. 

I look forward to answering your questions. I, again, applaud the 

committee for deciding to take on this task and think about these 

issues. They are perhaps among the most pressing public policy 

issues we face today. Thank you. 

[The prepared statement of Dr. Holtz-Eakin can be found on 

page 48 of the appendix.] 

Chairman HENSARLING. Dr. Goodfriend, you are now recognized 

for 5 minutes. 

STATEMENT OF MARVIN GOODFRIEND, FRIENDS OF ALLAN 

MELTZER PROFESSOR OF ECONOMICS, TEPPER SCHOOL OF 

BUSINESS, CARNEGIE-MELLON UNIVERSITY 

Mr. GOODFRIEND. Thank you, Mr. Chairman, and Ranking Member Waters. 

12 

My testimony today will talk about lessons from the financial crisis for Fed credit policy. I am going to reconsider the Fed’s performance in meeting its financial stability and employment mandates in 

the 2008–2009 financial crisis and Great Recession. I am going to 

emphasize three points, and then I am going to make one recommendation. 

First, Fed credit policy employed without bound, and not conventional monetary policy, played the preeminent role in stabilizing financial markets in the fall of 2008 and 2009. 

Second, Fed credit policy involves fiscal policy initiatives that are 

ordinarily the prerogative of Congress, but are not part of conventional monetary policy. 

And third, the financial panic and Great Recession were triggered in September 2008 in large part when prominent Members 

of Congress openly condemned expansive Fed credit support for 

AIG, and the public became frightened that neither the Fed nor 

Congress would offer further effective support for the financial system. I will elaborate on that as we go forward. 

Let’s see if I can turn the page. On the basis of that experience, 

I would recommend that the Fed’s credit policy responsibilities, visa-vis the fiscal authorities, be clarified explicitly and narrowed so 

as to avert a mishandling of the boundary in the future. 

Fed credit policy worked successfully on a massive scale, as Doug 

said, in the fall of 2008 by reintermediating banking and money 

markets. The Fed sold Treasury Securities from its portfolio, and 

it is no longer willing to lend to money markets. And the Fed 

loaned the proceeds from its sale of Treasuries to entities no longer 

able to borrow at reasonable rates, if at all, in money markets. 

While quickly reducing short-term interest rates to near zero, the 

Fed employed its monetary policy powers mainly to create reserves 

with which to fund credit policy. 

Crucially, the reintermediation powers of Fed credit policy involve fiscal policy, lending to particular private entities, whether financed by sales of Treasuries against future taxes or financed by 

the creation of reserve money. 

Unfortunately, the Fed’s very independence, the ambiguous 

boundary of expansive Fed credit policy, would help trigger the financial crisis of September 2008 and produce the Great Recession, 

a story that I will tell in the remaining time I have. 

Paul Volcker alluded to the problem in an April 2008 speech to 

the Economic Club of New York, where he described the Fed as 

having acted at the very edge of its lawful and implied powers 

when, in March, the Fed employed credit policy to facilitate the acquisition of Bear Stearns by JPMorgan Chase (JPMC). 

In retrospect, Volcker’s remarks can be seen as a life preserver 

to help the Fed persuade Congress at that point to make fiscal resources available, if need be, to stabilize financial markets. Instead, 

the fiscal authorities were not then so involved, and the Fed remained exposed to having its balance sheet utilized, in my term, 

as an off-budget arm of fiscal policy without formal authorization 

by Congress. 

The problem is this: The Fed credit policy cannot be the front 

line of fiscal support for the financial system. A Fed credit policy 

decision that commits taxpayer resources in support or one that deVerDate Nov 24 2008 18:20 May 30, 2014 Jkt 086691 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\86691.TXT TERRI
13 

nies taxpayer resources is an inherently highly charged political 

fiscal policy matter. 

Initiatives that extend the Fed’s credit reach in scale, maturity, 

eligible collateral, or to unsupervised or potentially insolvent institutions inevitably carry credit risks, incite questions of fairness, 

and potentially threaten conflict between the Fed and the fiscal authorities, with the potential to destabilize financial markets and 

employment. 

Worse, an ambiguous boundary of expansive Fed credit policy 

initiatives creates expectations of Fed accommodation in financial 

crises, which blunts the incentive of private entities to take preventive measures beforehand to shrink their counterparty risk or their 

reliance on short-term finance and build up financial capital. 

Events surrounding the Fed’s rescue of AIG in the fall of 2008 illustrate the problem. 

On September 16th, the Fed chose to lend $85 billion on equity 

collateral to rescue AIG in order to make AIG’s counterparties 

whole rather than risk worldwide collapse. The politics were such 

that prominent Members of Congress criticized the Fed’s credit policy as overreach and a questionable commitment of taxpayer funds. 

And the Fed, under Chairman Bernanke, replied the next day that 

it was stretched and could do no more. 

The U.S. Government appeared paralyzed. A run on money market funds was abated only after the U.S. Treasury, on September 

19th, guaranteed all money mutual fund assets. 

The best evidence of how severe the crisis became was that highyield spreads over Treasuries then jumped to 16 percentage points 

and remained elevated for months, well above the 6 percentage 

point spread that had been their peak since the credit turmoil 

began. 

How did all this result in the Great Recession? Well, the ensuing 

chaos got the public’s attention. The paralysis of government, the 

conflict between the Fed and the Congress, on the boundary of fiscal policy, frightened the public. 

Prudence demanded more saving. Households around the country, on average, saved 5 cents more of every dollar they would have 

spent in the next 3 months. The national household saving rate 

jumped by 5 percentage points. In macroeconomics, that is a disaster. It rarely, if ever, has happened in so short a time period. 

The collapse in demand pushed unemployment up sharply from 

6 percent to 10 percent in a matter of months. And the relatively 

mild contraction that had begun in December 2007 became the 

Great Recession. 

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

38 of the appendix.] 

Chairman HENSARLING. The Chair now recognizes Dr. Rivlin for 

5 minutes. 

STATEMENT OF THE HONORABLE ALICE M. RIVLIN, SENIOR 

FELLOW, BROOKINGS INSTITUTION 

Ms. RIVLIN. Thank you, Mr. Chairman, Mr. Sherman, and members of the committee. 

14 

I am really pleased to be here to testify on this very important 

question, which I interpret as, what economic goals should Americans expect of their central bank? 

I don’t believe there is a simple answer to this question. We can’t 

tell the Federal Reserve, just control inflation or just maximize employment or just keep the financial system stable. 

Americans, quite rightly, have multiple objectives for the performance of their economy, including high employment, low inflation, and financial stability. The job of the Fed and other policymakers is to balance those multiple objectives as well as they can. 

And that is not an easy task. It requires analysis and judgment 

in the face of necessarily uncertain forecasts. But focusing on any 

single objective would lead to less satisfactory outcomes than we 

have. 

First, we do want the economy to create jobs, preferably good 

jobs, for almost everyone who wants to work. 

Second, we want low inflation, or a fairly stable price level. We 

should not aim for zero inflation, because that makes it harder for 

resources to move out of falling demand sectors and risks tipping 

the economy into deflation. But persistent inflation above moderate 

rates is really dangerous. 

Third, we want to avoid financial crises with the potential to endanger economic activity in a major way. And the recent crisis illustrates how bad that can be. 

In general, these goals reinforce each other, but sometimes balancing is necessary. For example, reducing the risk of inflation or 

financial instability may require slowing growth and job creation. 

The economy is extremely complicated, and it is impossible to 

predict accurately. As my colleagues have pointed out, the Fed’s 

past track record is clearly mixed. Skillful monetary policy deserves 

some of the credit for the fact that inflation has been quiescent for 

more than 3 decades, although partial credit goes to fiscal policy, 

for example, the restrictive fiscal policy of much of the 1990s and 

an increasingly flexible and competitive economy. 

The Fed certainly bears some of the blame, along with many 

other culprits, public and private, for its failure to spot the dangers 

of the deteriorating lending standards that contributed to the housing bubble and inaction in the face of the overleveraged pyramid 

of housing-related derivatives whose crash brought the world economy to its knees. 

This was a house of cards that would have come down somehow. 

I am not sure that the AIG actions—although I wasn’t very enthusiastic about those either—were actually the triggering event. 

Once the unnecessary crisis happened, the Fed moved aggressively and imaginatively, in cooperation with the Treasury, to mitigate the economic damage. The Fed and other regulators had inadequate tools at that time. They now have more, thanks to this committee and your counterpart in the Senate, which, if used courageously and intelligently, can reduce the chances of a similar catastrophe. 

I believe that the Fed’s policy of aggressive and continuous monetary easing, keeping short-term interest rates close to zero and announcing its intention not to raise them without strong signs of recovery, plus substantial ongoing purchases of Treasury and mortVerDate Nov 24 2008 18:20 May 30, 2014 Jkt 086691 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\86691.TXT TERRI
15 

gage-backed securities has contributed substantially to recovery 

from the Great Recession. 

The question now is, how much accommodation is enough? There 

are downsides to extremely low interest rates, which discourage 

saving and may encourage unproductive trading and risk-taking. 

Moreover, the Fed should not go on increasing its portfolio indefinitely. 

So the question is, does the recovery have enough momentum to 

absorb a gradual tapering of the Fed’s asset purchases, followed by 

a slow reduction of the Fed’s portfolio as the assets mature? This 

is a judgment call, and people will differ. 

But to come back to the mandate, it seems to me that the drafters of the multiple statutes that define the Fed’s responsibilities 

did a good job of encapsulating the major objectives which Fed policymakers should have in mind as they decide on specific policy 

moves. 

I think it would be risky and unfortunate to change the basic 

mandates under which the Fed operates, although there is plenty 

to talk about in your series of hearings. 

Thank you. 

[The prepared statement of Dr. Rivlin can be found on page 65 

of the appendix.] 

Chairman HENSARLING. The Chair now recognizes Ms. Peirce for 

5 minutes. 

STATEMENT OF HESTER PEIRCE, SENIOR RESEARCH FELLOW, 

MERCATUS CENTER, GEORGE MASON UNIVERSITY 

Ms. PEIRCE. Chairman Hensarling, Congressman Sherman, and 

members of the committee, thanks for the opportunity to be part 

of your centennial look at the Fed. Although the Federal Reserve 

is turning 100, it has the regulatory appetite of a teenager, and 

that is what I am here to talk about today. So I would like to talk 

specifically about some of the new regulatory authorities they have, 

a little bit about the Volcker Rule, and then, finally, about economic analysis. 

Coming out of the crisis, it was not clear that the Fed would get 

more regulatory power. In fact, there was talk about taking some 

of their powers away. 

But persistent presence during deliberations paid off for the Fed, 

and they came out with new powers. That included getting new entities that they would oversee. Savings and loan holding companies 

are one example, certain designated financial market utilities, 

which are the plumbing of the financial system are another example, and then, of course, systemically important financial institutions. 

So we have seen already some of the non-bank systemically important financial institutions have been named and handed over to 

the Fed for regulation, and that is definitely an area to keep an eye 

on. The Fed tends to look at the world through a bank-centric lens. 

It is not clear whether they will be able to realize that these entities are not banks and really can’t be regulated as if they were. 

Another area in which the Fed got new powers is a little more 

subtle. They now have a regulatory mandate to consider financial 

16 

stability. That is really a very nebulous term, and it gives the Fed 

quite a bit of discretion in how they will interpret it. 

The Fed does not seem satisfied with the regulatory power it has. 

It has been making noises, Fed Governors and officials have been 

talking about unregulated areas, or areas they perceive not to be 

regulated enough in the market, and sort of implicit in that is, they 

are saying, hey, if you are looking for a regulator, you can look at 

us. 

And so, that includes money market funds. They have been very 

active in the debate, and quite critical of the Securities and Exchange Commission and its proposals for reforming money market 

funds. They are also very interested in the short-term financing 

market. 

As was mentioned this week, the Fed, along with four other regulators, finalized the Volcker Rule. The motive for this rule was 

certainly a good one: protecting taxpayers. It is being done through 

limiting proprietary trading and relationships with private funds 

like hedge funds. 

Unfortunately, the implementation is quite difficult, and we don’t 

know the full ramifications. A thousand new pages of regulatory 

text came out this week, and so that will take some time to absorb 

and figure out what was done. 

But there are a couple of things that are really clear. One is that 

by setting up this massive compliance operation—and it is a massive compliance operation not only for the banking entities that are 

affected, but also for regulators—we are going to be having folks 

concentrate on this ambiguous line that the regulation sets up 

about prohibited proprietary trading versus hedging and marketmaking, which are allowed to some degree. 

And so, you are going to have people spending a lot of resources 

trying to make sure they are on the right side of that line. Meanwhile, we could have risks over here that are real risks to the 

banks and financial systems that are completely not paid attention 

to because so much effort and energy is being spent on Volcker 

Rule compliance. 

Banks will be limited in their ability to hedge their own risks, 

so that is another area of concern. And then there is very much uncertainty about the effect on market-making, which is really an important function in our markets. It is a function that makes securities trade, ensures that there is a buyer for every seller and a seller for every buyer. So, it is really an area that we want to be careful to protect. 

One of the reasons that the Volcker Rule was so poorly done is 

because of the lack of analysis. There was no thorough, comprehensive economic analysis. And I think this was an area where the Fed 

really could have taken a leadership position. It is an agency that 

is rare in the sense that it is not run by lawyers like me. It is run 

by economists. And so, they didn’t take that opportunity, and actually that is not that rare for the Fed. It has a really spotty record 

on economic analysis. 

It is an independent regulatory agency, which means that it is 

not covered by Presidential Executive Orders requiring economic 

analysis. But interestingly, in 1979 the Fed put out a policy statement which was basically an endorsement of good regulation. And 

17 

included in that was really the importance of bringing in public 

participation, but also required for every rulemaking a regulatory 

impact analysis, which would include a look at what is the problem 

we are trying to solve, what are the options for solving it, and then 

what are the costs and benefits of those different options, trying to 

make sure that the costs are proportional to the benefit. Unfortunately, we ended up with a Fed that has this policy, but doesn’t 

actually abide by it. 

So just in closing, I think there are a number of things you 

should consider in your 100-year look: first, does the Fed need a 

statutory mandate to do economic analysis to make sure that it is 

disciplined about that; second, you should hold its feet to the fire 

in the way it exercises its new regulatory authority to make sure 

that they are doing that in an accountable fashion and a transparent fashion; and third, I think it is important to look at whether 

the Fed has too much regulatory authority, especially because its 

main job is monetary policy, and is all this regulatory authority 

distracting it from that? 

Thank you very much. 

[The prepared statement of Ms. Peirce can be found on page 59 

of the appendix.] 

Chairman HENSARLING. Thank you to the panelists for their testimony. 

Due to the rescheduling of this hearing, one of our original witnesses, Alex Pollock of the American Enterprise Institute, could not 

be here today. I ask unanimous consent to make his written statement a part of the record. Without objection, it is so ordered. 

[The prepared statement of Mr. Pollock can be found on page 68 

of the appendix.] 

The Chair now yields himself 5 minutes for questioning. 

I believe it was last year, Dr. Rivlin, you appeared before our 

Monetary Policy Subcommittee, and you testified in that hearing 

that you believed the dual mandate is ‘‘consistent with the principles enshrined in Dr. Taylor’s famous rule.’’ Do you still believe 

that? And if so, could you elaborate? 

Ms. RIVLIN. Yes, definitely. I think the dual mandate is nicely illustrated by the Taylor Rule, which actually says if the economy 

is growing faster than its potential, the Fed should look to raising 

interest rates. And if it is growing below potential, it shouldn’t. 

That is a very loose translation, but that is what I get out of the 

Taylor Rule. And John Taylor himself, who was at that hearing, 

has been critical of the Fed for not raising rates faster early in the 

last decade. 

Chairman HENSARLING. Some argue that the multiple mandates 

of the Fed should be narrowed. Others, I believe, perhaps believe 

there are others that should be expanded. So hypothetically, what 

if the Fed had another mandate in the conduct of monetary policy, 

and in some form or fashion, some iteration was mandated to abide 

by the Taylor Rule? How would you see that implemented? Would 

you advocate that policy? Would you not advocate that policy? 

Ms. RIVLIN. No, I am not a rules person. In the first place, there 

are quite a few versions of the Taylor Rule. And when I was at the 

Fed, the staff used to provide us with multiple versions for our ediVerDate Nov 24 2008 18:20 May 30, 2014 Jkt 086691 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\86691.TXT TERRI
18 

fication. But my general point is I think that you can’t encapsulate 

anything as complicated as the economy in a simple equation. 

Chairman HENSARLING. Let me follow up on a comment Ms. 

Peirce had, and if we are looking at potentially increasing mandates on the Fed, you said, Dr. Rivlin, in your testimony—I am not 

sure if this is an exact quote—that the Fed has to balance multiple 

objectives as best they can. I know that the SEC and the CFTC as 

they are balancing multiple objectives, and they are subject to statutory cost-benefit analysis. The Fed is not. Should they be? 

Ms. RIVLIN. Oh, I agree with Ms. Peirce that they ought to do 

more analysis of almost anything. Economists think that way. But, 

no, I wouldn’t put—it depends what you mean. I would encourage 

them to do analysis, but I wouldn’t say that there is any way to 

quantify exactly the costs and benefits of any particular monetary 

policy. And trying to do that would be more trouble than it is 

worth. 

Chairman HENSARLING. I think I will go in a different direction 

now. In viewing the multiple mandates of the Fed, looking at the 

Humphrey-Hawkins mandate, specifically the full employment 

mandate, which obviously should be the objective of the government as a whole, as most economists would define full employment 

still being commensurate with roughly 4 percent to 5 percent unemployment as people transition through. 

But if the Federal Reserve’s—I believe everybody still believes its 

principal mandate is that of classic monetary policy—full employment mandate is that critical, should the FDIC have a full employment mandate? Should the CFPB have a full employment mandate? Should the FSOC or the SEC have a full employment mandate? And in the seconds I have remaining, I would be happy to— 

Ms. RIVLIN. No, I don’t think so. I don’t think—the FDIC is a 

very valuable agency, but I don’t think it does anything that influences aggregate employment directly. And the Fed does. So I think 

it is quite different. 

Chairman HENSARLING. I only have 13 seconds left, so I will set 

a good example and yield back the balance of my time. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman, for 5 minutes. 

Mr. SHERMAN. I will point out that the FDIC can discourage, in 

effect, loans to small business. All of us here are besieged by people 

who want to start or expand a business and aren’t able to get a 

loan. And all of those arguments are made on the basis of employment. 

I think the chairman illustrated well an odd paradox. And that 

is in every other area, to be a really staunch Republican means you 

have to be in favor of cost-benefit analysis. We have had at least 

a dozen votes on the Floor about whether to require cost-benefit 

analysis for this agency or that agency. They are anxious to say an 

environmental regulator shouldn’t just look at how much cleaner 

the air can be, but what effect is that going to have on the cost to 

the economy? 

And the dual mandate of the Fed is, in effect, a required costbenefit analysis. The benefit or hoped for benefit of any easing is 

to provide additional employment. The cost is an increase at least 

in the risk of some undesirable inflation. Likewise, tightening the 

19 

risk is the possibility that unemployment will go up and the benefit 

is, hopefully, a reduction in the risk of inflation. 

So I think what we should do with the dual mandate is rephrase 

it as a cost-benefit analysis. That is to say, every time you are 

seeking to reduce inflation, look also at the cost to employment and 

vice versa. And I think that a 100-year-old agency should modify 

its lingo to meet current political needs, which is to say I think we 

should have a dual mandate, and I am happy to rename it a costbenefit analysis or a trip to Disneyland or whatever other name we 

want to put on it. 

Mr. Goodfriend, you spoke of the AIG bailout in such glowing 

terms that you disparage those who would even criticize it. That 

was done, I believe, under Section 13(3) of the Federal Reserve Act, 

which allows—at that time, allowed unlimited loans by the Fed. 

Now, there is a provision that we added in Dodd-Frank which says 

you can do that for general economic effect, but you cannot make 

loans under Section 13(3) for the purpose of propping up, say, a 

company named AIG. 

Should the Federal Reserve have unlimited authority to use unlimited funds, well above $85 billion perhaps, for the purpose of 

bailing out the creditors of a particular financial actor? 

Mr. GOODFRIEND. No, clearly not. My point there was that 

those—that giving the Fed the latitude, the independent latitude to 

use its balance sheet to make credit available to private entities by 

any means is not a good policy, because the boundaries are not 

clarified between what the Fed can do and what the Congress can 

do. Ultimately—and I said this long before—the Fed will be drawn 

into situations where it will overreach, and the Congress for political reasons will have to say, ‘‘No, no, that is a mistake.’’ 

And when the public sees the Congress and the Fed at odds in 

crisis, that creates an increase in the saving rate, which is a disaster for employment. So my point was about— 

Mr. SHERMAN. I want to sneak in one more question for the 

panel, and that is, nobody is proposing to put the Open Market 

Committee on C–SPAN. Thank God the Democratic caucus is not 

on C–SPAN. But what harm would be done to have an audit and 

continuing audits by the GAO of the Fed? Does anybody have an 

answer? Ms. Rivlin? 

Ms. RIVLIN. In the first place, in the usual sense of audit, the 

Fed’s books are audited. That is clear, and I don’t think the public 

always understands that. 

What this other use of the term audit is—I think sort of an independent study to second-guess them on monetary policy. And there 

are lots of those, actually, that are done. I am not sure commissioning the GAO to be the official kibitzer on Fed policy is particularly useful. 

Mr. SHERMAN. And should we somehow exclude the international 

transactions of the Fed or are those the ones we most want to report about? 

Ms. RIVLIN. We should know about international transactions as 

we should know about all kinds of transactions. 

Chairman HENSARLING. The time of the gentleman has expired. 

20 

The Chair now recognizes the gentleman from California, Mr. 

Campbell, the chairman of the Monetary Policy and Trade Subcommittee. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

I am going to kind of follow up where the chairman left off, but 

do so in a very open-ended manner. We talked about the three 

mandates, if you will—the maximum employment, stable prices, 

and moderate long-term interest rates. So, I am going to ask each 

of you, and we can start with you, Dr. Holtz-Eakin, about those 

mandates. 

Would you support, or if you were king of the forest, would you 

add to those mandates, reduce from those mandates, or make a 

modification or amendment or rule or whatever with any of those 

mandates? 

Mr. HOLTZ-EAKIN. I would not add; I would subtract. Certainly, 

I would like to see far more of a rules-based approach by the Federal Reserve. That doesn’t rule out discretion, because they can 

pick the rule they want to operate. 

But if they can provide it to the Congress, and the American people will know what they are up to, they themselves have said forward guidance is crucial. We need to know what they are going to 

do. Rules provide that. 

So, I think there is a much stronger case to be made for that. 

And then the question becomes, what do you put in such a rule of 

monetary policy. And I think there is a case to be made for a single 

mandate focusing on price stability. It has been done in the other 

central banks. 

There is a lot of research to suggest that it produces good employment outcomes, and that is what we want, in the end. And so, 

I think those are all issues that are very, very sensible things to 

discuss. 

Mr. CAMPBELL. I am going to change my order just a little bit 

because you advocate a rule. Dr. Rivlin said she is not a rules person. She said that—and I am putting words in her mouth—that 

you can’t simplify or boil this down to a single rule or rules. How 

do you respond to that? And then, I will ask Dr. Rivlin to respond 

to his suggestion. 

Mr. HOLTZ-EAKIN. Rules can be very complicated. And they don’t 

have to be simple. You don’t have to simplify the economy. You can 

have very complex decision-making. 

But you can be clear about it. And I think, for example, a way 

that the Fed could avoid this issue of auditing is it could say, ‘‘Here 

are the benefits and costs of what we are trying to do.’’ It could do 

the economic analysis and essentially provide an evaluation of its 

rule so that you can see what it is trying to do. That is very valuable. 

Mr. CAMPBELL. Okay, Dr. Rivlin, I probably butchered what you 

said, but this is your chance to respond, agree, disagree. 

Ms. RIVLIN. I think the Fed should be very clear about its objectives. It should be clear about how it is trying to get there, and if 

it wants to have a mandate—have a rule like we are trying to keep 

inflation around 2 percent, that is just fine. 

21 

But what I meant was I just don’t think that you can put into 

a single equation and keep following it. An exact rule for anything 

is complicated, as is the U.S. economy. 

Mr. CAMPBELL. So what about the three mandates as they stand? 

Ms. RIVLIN. I would leave the three mandates as loosely stated 

as they are, but urge the Fed to be more specific about its objectives and its policies. 

Mr. CAMPBELL. Okay. Professor Goodfriend? 

Mr. GOODFRIEND. Two of the three mandates actually are 

achieved with one stone. Low inflation keeps long-term interest 

rates low. High inflation is probably the most important factor in 

raising long-term interest rates. 

Fear of inflation, even without actual inflation, is probably the 

most important in moving long-term rates up. So I will take—low 

inflation should be a priority because it achieves the first mandate 

and the third mandate. 

What I would say about the second one, employment, is that inflation should get the priority even in the short run. And only if 

employment proves to be something that the Fed can deal with in 

the short run in a way that is commensurate with confident, stable 

inflation, should monetary actions be undertaken to stimulate employment. 

The Taylor Rule is a pretty good compromise, I would say. And 

I think the Taylor Rule would, in any case, serve as a great benchmark against which the Fed should be judged. 

Mr. CAMPBELL. Ms. Peirce? 

Ms. PEIRCE. As a non-economist, I try to stay pretty far away 

from monetary policy. But I do think, just as a general matter, it 

is good to have people concentrate on the thing that they are really 

able to achieve. And I don’t think that is employment for the Fed. 

Mr. CAMPBELL. Okay. I will set a good example, and I will yield 

back the balance of my time, as well. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Connecticut, Mr. Himes, for 5 minutes. 

Mr. HIMES. Thank you, Mr. Chairman. I really do want to thank 

you for holding these hearings. I think the hearings that we have 

had, these are some of the more intellectually and analytically interesting. They are not necessarily partisan, as the discussion is 

playing out today, but they really are critical. 

One of the panelists—and, by the way, thank you all for being 

here and for your patience—explicitly said that the Federal Reserve’s activities in the face of the financial crisis were essential. 

And I got the sense from, at least most of the panel, that there is 

general agreement on that. 

Those authorities, of course, then, were I think looked on somewhat askance by this Congress. And there are all sorts of proposals 

to limit those authorities, even though I think most of us would 

agree that they were, in fact, essential to helping pull us out of the 

nosedive of 2008, very, very interesting issues. 

For what it is worth, Mr. Chairman, my own view is that we as 

a Congress have a responsibility to conduct oversight. But history 

would show, and country after country would show, that if we compromised the independence of the monetary authorities, we would 

be eroding one of the real cornerstones of American economic staVerDate Nov 24 2008 18:20 May 30, 2014 Jkt 086691 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\86691.TXT TERRI
22 

bility and growth. The prospect of monetary policy subjected to the 

tender mercies of the House of Representatives horrifies me, frankly. 

I would like to actually take up Dr. Peirce on some of her comments on the Volcker Rule. I have been thinking about it and following the Volcker Rule very closely for some time now. You are 

very critical of the Volcker Rule. I am not, not because I necessarily 

think it is a great rule, but simply just that I have never been able 

to quite figure out an alternative. 

You suggest that perhaps better market discipline would work, 

by which I assume you mean incentives, supply-demand, clear price 

signals, and that if shareholders and creditors could evaluate proprietary risks taken, that perhaps that would be a better alternative to the Volcker Rule. That is sort of the core of your argument. 

I would really like to explore that with you, because it is not at 

all clear that in a system where a bank comes to believe that they 

can take big bets, and that if those bets go wrong, they will be able 

to go to the window, they will be able to rely on Federal support, 

that the incentives are anything other than to take large and irresponsible bets. 

I would also point out that, having worked in a financial institution, credit and exposure changes hour by hour, and it is reported 

to shareholders, at best, quarter by quarter, and frankly, even on 

an annual basis, the information is pretty opaque. So I am wondering if you really think that given all of those limitations and incentives, there is a market-based approach to reducing proprietary 

risk in contrast to the Volcker Rule? 

Ms. PEIRCE. I do. I agree with you that we need to make some 

changes to get there, but I think that the market is actually more 

capable of monitoring these types of things than regulators who are 

limited in the amount of information they have. 

Mr. HIMES. But surely the market gets a lot less information on 

day to day and quarter to quarter and even annual risk positions 

than the regulators do and can. 

Ms. PEIRCE. Yes, but I think if you have a market where the incentives are correct so that the shareholders and the creditors 

know that not only are they going to lose money when something 

bad happens, but potentially even—in the case of shareholders—be 

asked to fork over more money, I think then they have a real incentive. And I think incentives are what make people good monitors. 

That doesn’t mean that they are going to be able to be in the institution and know moment by moment how the credit risks are 

changing. What it does mean is that they have to put people in 

place managing those institutions who are going to be on top of 

that. And when they see a failure, they have to make the call of 

whether they want to get rid of those people. 

Mr. HIMES. Okay. Long topic, but I have one other question, and 

I hope you can help me with this. I have thought a lot about costbenefit analysis—economic analysis as well, too. As we think about 

the costs of regulation, they are pretty clear. And the cost of compliance with the Volcker Rule will be meaningful. We can get pretty close on what those costs are, pretty specific. 

23 

The benefits, of course, have to include the avoidance of the kind 

of catastrophe that we saw in 2008, $17 trillion in eliminated asset 

value at its trough, I guess. And we didn’t know if it was going to 

be $34 trillion or a hundred—who knew? Who knew? 

How do we factor in the benefits, which I assume are mainly the 

avoidance of that sort of catastrophe. How do we factor in the timing and magnitude and probability of those costs avoided, i.e., benefits? 

Ms. PEIRCE. You do have to take that into account. But unfortunately, what usually happens when people have these discussions 

is they say, ‘‘Look, the financial crisis was terrible, and so, any rule 

we put in place is good.’’ But then you have to link it back and say, 

‘‘Okay, would this rule actually have helped?’’ And in the case of 

the Volcker Rule, proprietary trading really wasn’t at the root of 

the last crisis. 

Now, it could be at the root of a future crisis. But the question 

that you have to ask is, what will this rule actually prohibit? And 

it may not be that it would prohibit something really terrible. It 

may be that there is an option that would be cheaper but that 

would achieve a better result and do it more effectively. 

Mr. HIMES. Thank you. 

Thank you, Mr. Chairman. I did not set a good example. 

Chairman HENSARLING. No, the gentleman from Connecticut did 

not. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, the vice chairman of the Monetary Policy and Trade 

Subcommittee. 

Mr. HUIZENGA. Thank you, Mr. Chairman. And I don’t have a 

track record of setting a good example either, but I am trying to 

work through that. 

Sort of continuing on where my friend, Mr. Himes, was going, 

Ms. Peirce, you had said that accountability with the new responsibility was one of the things that you believe ought to be held up 

for the Fed by us. 

And I guess the question, sort of a rhetorical question is—maybe 

not a rhetorical question, but the question you kind of posed—does 

it have too much regulatory responsibility, is sort of what I heard. 

I just want to confirm that is sort of where you are at, and then 

I would like the rest to sort of comment on that. Are we in waters 

that the Fed should be in, and has the capability to handle? 

Ms. PEIRCE. I absolutely believe they have too much regulatory 

responsibility right now. 

Mr. HUIZENGA. Okay. Dr. Rivlin? 

Ms. RIVLIN. I was very skeptical of giving the Fed as much 

microprudential regulatory authority as it has, because I thought 

that would detract from the concentration on these other mandates, 

which I believe are really important, including the financial stability. I actually favored the Dodd version of Dodd-Frank, which 

would have— 

Mr. HUIZENGA. He is looking down at— 

Ms. RIVLIN. —created a central regulatory agency, not the Fed. 

But we didn’t do that. 

Mr. HUIZENGA. Didn’t they attempt to do that basically with the 

CFPB? 

24 

Ms. RIVLIN. Pardon me? 

Mr. HUIZENGA. Didn’t they basically try to do that with the 

CFPB, at least in some part, and then fund it through the Fed? 

Ms. RIVLIN. No, that is only consumer regulation, which I also 

thought was a good thing to do. I wouldn’t have funded it through 

the Fed. But we needed an agency directed to consumer product 

regulation. 

Mr. HUIZENGA. Professor Goodfriend? 

Mr. GOODFRIEND. I feel that the Fed’s problem is the problem of 

regulation in general in the finance area. Regulation is trying to do 

the impossible. It is trying to compensate for inordinately low capital minimums. 

I would be happiest if capital minimums were raised by Congress 

so as to remove some of the regulatory burden for safety and 

soundness in the first place. I feel like trying to substitute for excessively low capital minimums with regulation policy is not going 

to work, and it is a dead end. 

And I think the Fed should ultimately be doing less regulatory 

policy and enforcing through Congress’ will higher, much higher 

capital requirements on banks. 

Mr. HUIZENGA. Dr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. I want to echo my colleague, Alice Rivlin’s, 

thought. I think that it was a mistake to have more of the microprudential regulation. 

I am even less enthusiastic about the Volcker Rule than is Ms. 

Peirce. I think it is a big misstep. 

And I want to echo what I said in my opening remarks. I do not 

believe the Fed should be involved, and I don’t believe the Financial Stability Oversight Council will be successful, in this 

macroprudential effort to control systemic risks. And I would take 

it out of that exercise, as well. 

Mr. HUIZENGA. Okay. In my last minute-and-a-half, quantitative 

easing and the necessity of it. Do you all agree that it was a necessary step? Does anybody not agree? 

Mr. HOLTZ-EAKIN. It depends which one you are talking about. 

I believe— 

Mr. HUIZENGA. One, two, three, or— 

Mr. HOLTZ-EAKIN. No, I think the Fed, its initial response is to 

be applauded. It moved from a very mistaken institution-by-institution approach to opening liquidity to vast pieces of the financial 

markets. That was exactly the right thing to do. Since then, everything else has been a policy error. 

Mr. HUIZENGA. It seems to me we might be caught in a catch22 at this point, because markets are going to react as they have 

somewhat. But moving on, how do others around the world view 

our QE stance, positively, negatively? 

Mr. GOODFRIEND. So I think what you see around the world is 

countries feel like they are kind of being whipsawed back and forth 

by the talk of QE or not QE in the United States. And I regard 

that as simply what markets are saying, the Fed is trying to run 

an excessively discretionary policy with respect to QE. 

And so it is impossible—whether it is foreign governments to 

plan, or U.S. businesses or financial participants to plan, because 

the Fed refuses to specify anything about the glide path where QE 

25 

is going. Again, it comes back to the benefit of rules from the Fed. 

But one of the benefits is letting other countries, letting other businesses, plan for the future. 

Mr. HUIZENGA. And can we possibly be critical of other countries 

trying to essentially do the same thing? I see a shaking of a head, 

but— 

Mr. HOLTZ-EAKIN. No. 

Mr. HUIZENGA. I assume there is consensus on that? 

Mr. GOODFRIEND. If you are talking about Japan, there is a difference. Japan has deflation. I am for price stability. If a country 

has outright deflation, then I think you can make a case for stimulative monetary policy. The United States does not and is nowhere 

near that. 

Mr. HUIZENGA. Thank you. I yield back. 

Chairman HENSARLING. The nodding of a head goes with the tapping of a gavel. 

The Chair now recognizes the gentleman from Delaware, Mr. 

Carney, for 5 minutes. 

Mr. CARNEY. Thank you, Mr. Chairman. I want to second the 

comments of my colleague from Connecticut, Mr. Himes, and thank 

you for having these hearings, and for this, I think you said yearlong process. I find it very educational, and very good for me as a 

relatively new Member. I want to thank all the panelists for being 

here and bringing your expertise. 

I have a lot of questions and very little time. So maybe what I 

should do is go kind of to the end. The chairman, in his opening 

remarks, envisioned a process where we would have these reviews. 

We have actually had another hearing where it was the international central bankers’ perspective. And we heard a lot from that 

panel, a very good panel, very good information, what we are hearing today. 

And they basically said that Congress should set the mandate, 

set the goals, kind of get out of the way, monitor the Fed’s actions 

to those goals, and make adjustments periodically. The chairman 

envisions the legislation. 

How would you change the mandate that the Fed has now? You 

have addressed this, each of you, I think a little bit. But could you 

say it simply stated as well for me? 

Mr. HOLTZ-EAKIN. I personally would narrow its scope toward a 

greater focus on monetary policy. I think some of these other activities are a distraction to the Fed, and it is not going to do them very 

well. And within monetary policy, I want to echo the—you get two 

of those mandates with one by taking care of inflation. I, for one, 

believe that inflation should be the primary objective of the Fed. 

As I said, you can make a case for a single mandate, a price stability mandate. I am not religious about it, but I certainly think 

that the more clarity the Fed gives to how it is pursuing its mandate, the better off everyone will be. 

Mr. GOODFRIEND. I would follow up on that by reiterating the 

point that you get two goals for the price of one by putting inflation 

first. I want to add something to that, also. 

You not only get low interest rates in the long term, you not only 

get stable inflation, but if you look back at the history of unemployment fluctuations in the post-World War II period, before Paul 

26 

Volcker stabilized inflation, they were literally the result of the Fed 

putting a priority on unemployment first, and then allowing the inflation rate to get out of control, and then creating recessions, one 

after the other. This was called go-and-stop policy. So you get even 

benefits for unemployment by putting a focus on—you get threefor-one, actually. 

Mr. CARNEY. So—right, so does the Taylor Rule mitigate against 

that effect? 

Mr. GOODFRIEND. Pardon me? 

Mr. CARNEY. The Taylor Rule? 

Mr. GOODFRIEND. The Taylor Rule is a way to simplify, putting 

a priority on inflation, but allowing some room for responding to 

fluctuations in output relative to— 

Mr. CARNEY. So it does give some nod, if you will, to employment? And you said—I think you said earlier that you thought it 

was a good compromise? 

Mr. GOODFRIEND. Yes. The Taylor Rule is a very good benchmark 

against which central bankers should judge their own actions and 

against which they should be judged by legislative oversight. 

Mr. CARNEY. Ms. Rivlin? 

Ms. RIVLIN. I would leave the mandates alone, at least the three 

we have been talking about: low inflation; maximum employment; 

and financial stability. It is certainly possible to fold the employment goal into an inflation target, if you recognize the deflation is 

a bad thing and the Fed should move in both directions. 

But right now, when inflation is not anywhere on the horizon, 

and unemployment is high, for the Congress to suddenly say, ‘‘We 

don’t want you to care about unemployment. We want you only to 

concentrate on inflation,’’ I think the average citizen would say, 

‘‘Huh? What are they thinking?’’ 

Mr. CARNEY. I think that is part of the problem. In some ways, 

it is a political problem. Most people understand what employment 

is. They don’t always understand what inflation is, and what 

causes it, and the relationship. 

So if you are talking about just inflation, deflation, price stability, you get—but if you talk about employment, and at least as 

part of the conversation, then from our perspective, representing 

the constituents that we do, there is a balance there. 

Dr. Holtz-Eakin, you are jumping out of your chair. 

Mr. HOLTZ-EAKIN. I agree with everything you said, but I just 

want to point out something, that if you are very clear about how 

this would work, it would be about inflation expectations. What are 

people expecting in inflation? 

And in the current situation, the fear of deflation, expectations 

of price falling, would cause people to move aggressively in exactly 

the way that Dr. Rivlin wants them to. 

Mr. CARNEY. Thanks very much. If I had more time, Ms. Peirce, 

I would ask you about the alternative to the Volcker Rule. But I 

don’t. Thank you. 

Ms. PEIRCE. We can talk offline, if you like. 

Mr. CARNEY. I yield back. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Ohio, Mr. Stivers, 

for 5 minutes. 

27 

Mr. STIVERS. Thank you, Mr. Chairman. I would like to thank all 

of the witnesses for being here. And I am going to go ahead and 

continue on with the line of questioning from the gentleman from 

Delaware. 

What do folks on the panel think would be an alternative approach to the Volcker Rule that would work better, or is there one? 

Mr. HOLTZ-EAKIN. I first want to say that I do not believe that 

proprietary trading had anything to do with the crisis. And for that 

reason, I would not have pursued something of the type of the 

Volcker rule. So I think it is a misguided enterprise at the outset. 

If you are deeply concerned about the notion that depositors’ 

funds, which are backed by taxpayers’ deposit insurance, are being 

used for an inappropriate purpose, then the answer is to create 

narrow banks that have the sole function of taking deposits and 

then use them to invest only in something like Treasuries. Those 

entities thus are very safe and are not going to cost the taxpayer 

anything. And the remainder of the financial institutions, labeled 

whatever you want, are not narrow banks, and they can go do what 

they want. 

Mr. STIVERS. Let’s go ahead and let everybody opine on that if 

you have an opinion. 

Mr. GOODFRIEND. To go back to my testimony, I don’t believe 

that the crisis had, at its core, the issues that proprietary trading 

had to do with, so I completely agree with Doug. 

I think what we should be focusing on is, as I said in my testimony, excessive expansiveness of the Fed’s willingness to supply 

credit in crises, which I think had much to do with exacerbating 

the crisis as it occurred in 2008, especially when the Fed ran into 

conflict with the Treasury. 

Once the government looked paralyzed, we really, in my opinion, 

got the worst of it. Before that time, the Fed had been handling 

things, and we were in a mild recession with some difficult deflation of house prices. But once the public saw that the government 

was at odds with itself, that, in my opinion, caused the great panic, 

the rise in the saving rate and so forth. And that is, above all, what 

we should avoid going forward. 

So rather than focusing on the Volcker Rule, I would focus on the 

boundary of the Fed’s credit policy powers vis-a-vis the fiscal authorities, so that there can be some prearranged agreement on how 

to handle crises. 

Ms. RIVLIN. I don’t think the Volcker Rule is a particularly promising avenue for controlling the real problem, which is excessive 

risk-taking and bubbles of the sort that we had. 

The things that are actually prominent in the Dodd-Frank Act, 

allowing the Fed together with other regulators to raise the capital 

requirements and to control excessive leverage, are much more important as general tools, as is the resolution authority to avoid having to have a big institution fail in a disruptive way. So, I would 

concentrate on those. 

Ms. PEIRCE. I think it is important to recognize that lending also 

can be quite risky, so it is not proprietary trading that should be 

the target specifically. But it should be putting in measures to 

make sure the market is watching. 

28 

And you can do that through contingent capital. You can do it 

through having shareholders face—taking away their limited liability, so that they actually have to pay in if there is a problem. There 

are some creative ways to do that. And, of course, higher capital 

requirements would be effective at this, too. 

Mr. STIVERS. Do any of you—and several of you volunteered in 

your answers—believe that proprietary trading in any way caused 

the financial crisis in 2008 and 2009? 

Ms. RIVLIN. No, but I think it can be a problem for commercial 

banks, if it gets out of hand. 

Mr. STIVERS. If it got out of hand. That is fair. And I would want 

to follow up on a couple of things that folks said, because, Dr. 

Holtz-Eakin, you talked about Treasuries. And under the current 

Volcker Rule, Treasuries and GSEs are exempt from—they are allowed investments. 

But given our mounting national debt and record low interest 

rates, is it really fair to say—you said they were kind of risk-free. 

I don’t think it is fair to say they are risk-free anymore. They are 

a lower risk, certainly, than equities. 

Mr. HOLTZ-EAKIN. They are. That was just an example of, if you 

want to have entities that have insured deposits, you can control 

their portfolios very tightly. And if you are not going to provide insurance, let people trade and invest as they see fit. 

Mr. STIVERS. I will yield back the balance of my time. And actually— 

Chairman HENSARLING. The gentleman yields back his 2 seconds. 

[laughter] 

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

Maloney, for 5 minutes. 

Mrs. MALONEY. I thank the chairman, the ranking member, and 

the panelists for being here today. 

Although some of you say that proprietary trading was not part 

of the financial crisis, it has been documented to have been the 

cause of the London Whale, which caused a loss of $6 billion. That 

is unquestionable. And some allege, or believe, that the subprime 

proprietary trading in CDOs, or collateralized debt obligations, was 

a severe cause of the financial crisis. 

But instead of debating it back and forth, we could call for a 

GAO report on the role that proprietary trading played in the financial crisis and have a legitimate report that comes back to us. 

I would sponsor such a request. If any Republican would like to 

join with me, then we could have an independent analysis and research project which would document that. 

One of the things I feel we don’t have from the financial crisis 

is what we had after 9/11, and that is a commission that really 

went in and analyzed in depth and reported on what caused 9/11, 

with examples, with funding, with staff. That was never done, really, with the financial crisis. It has been many different looks and 

perspectives, but I think that is worth doing, if my colleagues 

would like to join in making such a request. 

I want to ask—Dr. Rivlin, it is good to see you again. And thank 

you for your public service. And I thank all of you for your hard 

work. In your testimony, you said that it is entirely appropriate for 

the Fed to have multiple mandates, and I agree. 

29 

You also said that it is possible but not certain that the Fed’s low 

interest rates in 2003 and 2004 contributed to the bubble that led 

to the financial crisis. Could you elaborate a little bit on that? 

Ms. RIVLIN. Yes. I think there were multiple causes of the financial crisis, and that the principal one was allowing the decline of 

lending standards, an egregious decline. And I fault all the regulators in not stopping that. But, unquestionably— 

Mrs. MALONEY. And then the trading of those, proprietary trading— 

Ms. RIVLIN. Later. 

Mrs. MALONEY. —of those subprimes— 

Ms. RIVLIN. Certainly, there was a whole pyramid of derivatives 

erected on top of the American housing mortgages, and it was the 

very overleveraged pyramid that came crashing down. But I think 

low interest rates always contribute to a bubble. If you can borrow 

money— 

Mrs. MALONEY. I am curious if you would elaborate on how you 

think the Fed should have balanced its mandates in that situation. 

Ms. RIVLIN. I am not— 

Mrs. MALONEY. Should they have kept interest rates low to maximize employment, but then adopted stronger bank regulations to 

protect financial stability? Should they have raised interest rates 

earlier than they did? 

Some are arguing, and in one editorial, even, in The New York 

Times today, that if you raised interest rates to 3 percent to 4 percent, that would help us in the recovery. And what is your comment on that? 

Ms. RIVLIN. I don’t think raising interest rates would help the recovery. But to go back to the 2003–2004 period, I think the Fed 

was in a box then, because it did not have appropriate tools to deal 

with an asset price bubble, as it did not in the 1990s, when we had 

the stock market bubble, which was clearly a bubble. I was at the 

Fed at the time, and we didn’t really have the right tools for dealing with that, because raising interest rates at that moment would 

have damaged—would have slowed the economy drastically. You 

would have had to raise them very high to affect the bubble. And 

we didn’t do it, and I think we were right. 

Mrs. MALONEY. The Fed’s unconventional monetary policies during and after the crisis have been extensively debated and commented on today, too. And, obviously, when the Fed adopted many 

of these policies, they were in clearly uncharted waters. 

We can debate whether they should use these policies in a crisis, 

but do you think the Fed should use unconventional policies only 

in a crisis? Or should they be willing to adopt new unconventional 

policies in good times, too? 

Ms. RIVLIN. Good times don’t challenge the Fed the way a crisis 

does, so I am not sure exactly what unconventional policies would 

be appropriate. The main thing is to avoid the crisis. But once you 

have it, then you have to do everything you can think of to stabilize 

the situation. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Garrett, the chairman of our Capital Markets and GSE Subcommittee. 

30 

Mr. GARRETT. Thank you, Mr. Chairman. 

And to the gentlelady of New York, that is an interesting idea, 

as far as a study. So let’s just think about—we should probably get 

together and think about that some more, doing something like 

that. 

Maybe couple it with Ms. Rivlin’s comment about the—you were 

just talking about underwriting standards and the problems in 

those areas, so there might be—if we are going to ask for something, we might as well ask for a couple of points in—as far as the 

study goes. 

Mrs. MALONEY. I would welcome any opportunity to work in a bipartisan way on this committee. Thank you. 

Mr. GARRETT. Great. Thanks. 

Earlier today, the committee heard from Secretary Lew to get 

some answers, or at least we were attempting to get some answers 

from him. And during that time, I expressed to him my concerns 

regarding the lack of accountability and transparency that has 

been part and parcel of, I said, this Administration. 

So I want to carry that through here with this discussion and the 

theme of accountability and transparency, as we examine the 

broader theme of the Fed. 

The gentleman from California has already sort of laid this out, 

and we agree that the Fed has an awful lot on its plate, and I 

would argue it has—just as he does, I think—it has too much on 

its plate. On the monetary side, the Fed must contend, as he said, 

with the dual mandates. The Fed also maintains responsibility—I 

will get into those in a minute—on supervising and regulating 

bank holding companies, providing bank services to deposit institutions and so on. And Dodd-Frank has just added to all that. 

Now, with such vast powers, including an independent funding 

stream outside of the appropriation process, its role as lender of 

last resort, the Fed, then, should be held to a very, very high bar 

in terms of accountability and transparency to not only Congress, 

but also to the American people. 

And I am really concerned that the level or lack of level of accountability and transparency at the Fed is disproportionate at this 

point to its power. 

I just have a couple of questions. I am not sure which order I 

will go in; maybe I will just run down the list this way. 

Ms. Peirce, by our count, the Federal Reserve has had only 5 

meetings over the last 2 years, 5 open, public meetings over the 

last 2 years. Considering this expansive power that they have, and 

it is now as regulator as well, do you think that is an appropriate 

amount of openness and public meetings? 

Ms. PEIRCE. I think that is a really important concern that you 

raised. They do a lot of their rulemaking behind closed doors. 

And as we saw this week with the Volcker open meeting, some 

really valuable things come out of those open meetings. You get the 

dialogue between the staff and the Chairman and the other Governors, and that is very helpful. 

Mr. GARRETT. I don’t have a lot of time. Can I ask you—and anyone else from the panel—after we are done here, to send me any 

recommendations that you might have on that area, if you would, 

please? 

31 

I will swing down to the other end of the table, and say, you are 

probably aware that earlier this year, the House passed the SEC 

Regulatory Accountability Act. This legislation enhances the SEC’s 

existing economic analysis requirements, requiring that it first 

clearly identify the nature of the problem that would be addressed 

before issuing any new regulations, and also require economic analysis to be performed by the SEC’s Chief Economist. 

Under current law, the Fed is not obligated to perform such a 

cost-benefit analysis. Given its role as—central role in Dodd-Frank, 

do you think this is appropriate? And if not, what would you recommend? 

Mr. HOLTZ-EAKIN. I think the Fed should be required to provide 

such an analysis. I am cognizant of how difficult this is to do sometimes. This came up earlier in the discussion about quantifying the 

benefit, but that doesn’t mean you shouldn’t do it. It tells you, 

then, if you can quantify the costs exactly, that the benefits have 

to be at least that big, or it is not worth doing, and you need to 

know that. So I would ask the Fed to do that on a regular basis. 

Mr. GARRETT. Great. We have heard from a lot of community 

banks that all the regulations under Dodd-Frank are creating a 

huge problem for them. I will get right to the point here. Over at 

the OCC, there is something called the community bank ombudsman located within the OCC. In light of all the extra powers now 

that the Fed has, should we have something akin to a community 

bank ombudsman within the Fed? 

Mr. HOLTZ-EAKIN. I think I would like to have the opportunity 

to think about that and get back to you. I worry about creating favored constituencies who have their own representative inside the 

Fed. 

Mr. GARRETT. Okay. Yes, sure? 

Mr. GOODFRIEND. On cost-benefit, I would like to point out something. The Fed’s so-called QE policies today are really what we call 

in finance a carry trade. Carry trade means you are borrowing very 

short term to hold long-term securities. That is not a monetary policy. A carry trade is a pure fiscal policy. 

So where I would start, if you want to argue that the Fed should 

be undertaking cost-benefit analyses, I would ask them, well, what 

do you think are the potential costs or value at risk, so to speak, 

in the banking business, of a carry trade of the nature that you are 

carrying on? Then, we can talk about the benefits that you think 

there are. 

Mr. GARRETT. We have tried to get that number from them, yes, 

but thank you. That is a good point. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger, for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

And thank you, panelists, for being here today. It is very good 

to have heard your responses. 

I would like to ask each of you—Chairman Hensarling has shown 

this debt clock running on either side of the room. I really wanted 

to get your thoughts on how the policies of the Fed could lead to 

compounding the problem when it comes to interest rates on the 

debt. Do you believe when interest rates rise over the coming 

32 

years, and the spinning trajectory we are on towards the close of 

this decade, the interest rate payments, along with the annual deficits, will push America’s debt to unsustainable levels, perhaps close 

to what we are seeing in Europe? 

Would you like to start, Mr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. I am already so troubled by the trajectory of 

the U.S. debt that it will not take higher interest rates to trouble 

me further. Certainly, we are on an unsustainable trajectory. If we 

were to get a normalization of interest rates, either quicker or 

something above what people like the CBO forecast, it is going to 

put enormous pressures further on the Federal budget. So we are 

in a dangerous position as a nation, and it should be fixed. 

Mr. PITTENGER. How would you fix it? How would you mitigate 

it? 

Mr. HOLTZ-EAKIN. It would be up to the Members of Congress 

and the Administration to fix the spending problem that emanates 

from the mandatory spending programs in the budget. That is our 

problem. That is what we haven’t touched. That is what needs to 

be fixed. 

Mr. PITTENGER. As it relates to the interest rates? 

Mr. HOLTZ-EAKIN. In the end, we want to pray for higher interest rates. They will, in fact, reveal that the economy is recovering. 

And so, at all costs, we don’t want to avoid higher interest rates. 

We want them to normalize. And we want the fiscal policies to be 

put in place that allow us to sustain those higher interest rates 

without a threat to the stability of the Federal budget. 

Mr. PITTENGER. Very good. Thank you. 

Mr. Goodfriend? 

Mr. GOODFRIEND. I completely agree. I have nothing to add to 

Doug’s comments. 

Mr. PITTENGER. Ms. Rivlin? 

Ms. RIVLIN. I believe that the trajectory of debt is very worrisome. That doesn’t mean that I think we need more austerity now. 

I think, actually, we need less. But I was very disappointed that 

the budget deal—which admittedly is a lot better than no budget 

deal—did not come to grips with the longer-run problem of the debt 

rising faster than the GDP. 

I think that means two big, difficult things. It means entitlement 

reform, and it means tax reform that will raise more revenues in 

the long run through a more pro-growth tax system. I served on 

two commissions, one of them along with the chairman, that explored those issues. I think we can get to a bipartisan agreement 

on it, and we ought to do it as fast as the Congress can. 

Ms. PEIRCE. Again, I am not an economist, but I know we are 

spending too much. 

[laughter] 

Mr. PITTENGER. Well said. I concur with that. 

Professor Goodfriend, recently I introduced some legislation, H.R. 

3240, and it deals with Regulation D as a Study Act. This bill calls 

for the GAO to take a look at Reg D as it relates to the number 

of transfers allowed for a given individual, that being six. And 

working with the Fed, I just wanted to get your take on this bill. 

If Congress were to eliminate or modify the six-limit transfer under 

Reg D, would that cause concerns to the Fed? 

33 

Mr. GOODFRIEND. I am not aware of what is in the bill. If you 

can explain it to me a little bit— 

Mr. PITTENGER. It is a bill for credit unions. It is really outdated. 

It is a bill that was—the policy was developed out in the 1980s. 

And I think through the electronic transfers and other forms of 

payment, there is a limit to how many transfers can be made. And 

so, it is a simple bill, and I just wanted to know if you— 

Mr. GOODFRIEND. It sounds like there had been a limit on transfers made by credit unions on behalf of their customers— 

Mr. PITTENGER. Yes. Yes, there is now. 

Mr. GOODFRIEND. Credit unions started out as relatively small 

collections of people who were allowed to set up banking facilities 

independent of being commercial banks. And since then, credit 

unions have gotten huge. They have become very important banking centers. 

I think it is time to treat them like banks under the law, and 

it sounds like your bill would do that. There are different sides of 

this debate that I am aware of, but I think that credit unions have 

long since become more and more like banks, and I don’t see any 

reason why they should be treated differently, if that is what this 

bill is about. 

Mr. PITTENGER. Yes, sir. Thank you. 

I yield back. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr, for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman. And thanks to the witnesses for being here. 

I want to start with Ms. Rivlin, and thank you for your service 

to the country in many different capacities. I was struck by your 

testimony just a few minutes ago about your wanting the Congress 

to resist austerity measures. And just for clarification purposes, the 

Federal budget, we spent presently, what, $3.7 trillion, is that 

right? 

Ms. RIVLIN. Something like that. 

Mr. BARR. And so for the last 5 years, we have had—we have run deficits in excess of $1 trillion for 4 years and close to $700 billion 

this past year. You are not suggesting that those policy results in 

any way resemble austerity? 

Ms. RIVLIN. I am suggesting now that the deficit has come down 

quite rapidly, and that puts a drag on the economy, and that cutting discretionary spending as much as the Congress did has retarded recovery. I am glad that part of the sequester was set aside 

in this agreement. But, yes, I think we do have austerity now. 

Mr. BARR. And I noted your favorable comments related to the 

budget agreement that the Congress will be taking up—the House 

will be taking up this afternoon. Do I take your testimony to mean 

that you generally agree with the concept that I think Dr. HoltzEakin has advocated pretty vociferously in the past, that replacing, 

or at least focusing the attention on mandatory spending reforms 

is where our focus needs to be? And to the extent that the budget 

agreement today does that, to the extent that we replace some of 

the sequester with a focus on mandatory spending reforms, are we 

heading in the right direction, as modestly as we may be? 

34 

Ms. RIVLIN. It is modest, but it did not come to grips with the 

major entitlements or mandatory programs, very modestly with 

Medicare. But it is the health entitlements over the long run, not 

immediately, but over the long run, and Social Security, which are 

driving Federal spending in the future. 

Mr. BARR. Thank you. 

Dr. Holtz-Eakin, in your testimony, when you talked about the 

core functions of the Fed—monetary policy, lender of last resort, 

bank holding supervision and systemic risk management—one 

thing that the Fed is doing as a result of Dodd-Frank now, which 

is somewhat unusual, I would argue, is providing the funding for 

a new agency, the Consumer Financial Protection Bureau. Where 

in those core functions is—where does this fit? 

Mr. HOLTZ-EAKIN. It doesn’t. And I don’t support that at all. I 

think that is something that should go through the congressional 

appropriation and oversight process. 

Mr. BARR. Okay. And for all the witnesses, a final question. I 

have about 2 minutes left in my time. 

I wanted you all to comment on the testimony of Chairman 

Bernanke before this committee earlier this year. And I asked the 

question about the exit strategy. Obviously, Chairman Bernanke 

has pursued a very aggressive quantitative easing and accommodative policy. It appears that Ms. Yellen is going to pursue that and 

continue that policy into the future. 

And one thing that we heard from the Fed earlier this summer, 

and from Chairman Bernanke, was a hint of possible tapering in 

the event that unemployment comes down to a certain level. And 

the mere suggestion of tapering resulted in a pretty significant revolt from the market. We saw the 30-year fixed-rate mortgage 

jump by 42 basis points. The Dow suffered back-to-back declines of 

more than 200 points. Billions of dollars fled the credit funds after 

just the hinting of the possibility of tapering. 

So my question is—and I asked this question then—how is the 

Fed going to avoid a catastrophic spike in rates when tapering actually starts? And the chairman’s response was, we just have to 

communicate, we have to be effective in telling the markets what 

we are doing. 

Do you think that is a satisfactory answer? Do you think, given 

the fact that the Fed’s balance sheet is where it is today, is tapering inevitably going to lead to a kind of catastrophic spike in rates 

that will be very, very damaging to GDP? 

Mr. GOODFRIEND. I think that what happened in May was a pulling back on the Fed’s tapering to the degree that a lot of the damage has already been done. There might be some reaction in rates. 

But I think the sooner the better they get on with it. I think there 

will be a relatively muted reaction. They should just not throw 

good money after bad, so to speak. And I would start it as soon as 

possible, especially if the budget deal is done in Congress. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus, for 5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. And thank you, panel. 

This has been a very informative discussion this afternoon. 

35 

I would like to first talk to Professor Goodfriend. It is always 

nice to see somebody from Western Pennsylvania, too, and see 

somebody from the fantastic university up there, Carnegie Mellon 

University. 

Professor, in what ways, if any, do you think the Fed’s interventions in financial markets have impaired the efficiency of banking 

in capital markets? 

Mr. GOODFRIEND. I don’t want to go over my testimony again, 

but I think there was a big negative effect in the way the Fed handled its interventions in the crisis. But even now, by intervening 

in mortgage markets to the tune of $40 billion a month in an ongoing way as part of this QE3, what the Fed is doing is making it 

very hard for private parties, for private entities to step back into 

the mortgage market, because what the Fed is doing is keeping the 

spreads low. 

One of the transitions that has to be made at some point is the 

markets have to become confident that the spreads will be allowed 

to rise to make it profitable to re-enter. And that is the way the 

Fed ultimately has to hand off Federal Reserve heavy intervention 

in these markets back to banking. 

And unless the Fed specifies its taper, specifies the extent to 

which it will go, get out, in a clear way, the markets can’t prepare 

to step in. So, I think the Fed has to come first in this chickenand-egg problem. 

Mr. ROTHFUS. Thank you. 

Dr. Holtz-Eakin, Chairman Bernanke has argued that the Federal Reserve’s participation in the oversight of banks of all sizes 

significantly improves its ability to carry out its central banking 

functions, including making monetary policy. Do you agree with 

this sentiment? 

Mr. HOLTZ-EAKIN. Not entirely. We see other configurations 

around the world, for example, where we have the central bank not 

as the primary regulator, and those central banks are able to conduct monetary policy very effectively, so England can do this. And 

so I am unconvinced that as a matter of structure, it needs to be 

that way. 

The second thing that the Fed argues is that it gives them information that is useful for the conduct of monetary policy. I don’t see 

why that information couldn’t be conveyed in an interagency fashion. And so I am certainly open to doing business in other ways, 

because I think the Fed is overstretched. 

Mr. ROTHFUS. Where we sit today, we have an interventionist 

Fed on the monetary policy side and an interventionist Fed on the 

regulatory policy side. What are the potential implications and 

risks for the health of the financial system and the broader economy because of that? 

Mr. HOLTZ-EAKIN. My concern with aggressive monetary policies 

has been essentially that they flunk a benefit-cost test. I am utterly 

convinced that the Fed can drive investors to riskier asset classes. 

I am utterly convinced that it has enormous ability to change relative returns to financial markets. 

I don’t think it has produced any real economic growth. And so 

I think—or not enough to merit the potential costs in terms of inVerDate Nov 24 2008 18:20 May 30, 2014 Jkt 086691 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\86691.TXT TERRI
36 

flated asset classes and/or bubbles, and some of them appear to be 

in the making. 

And I worry, as this is all about financial instability coming out 

of those asset classes, to the larger financial system. I think those 

costs outweigh the benefits of the policy. 

Mr. ROTHFUS. Ms. Rivlin, when asked in October 2008 if GrammLeach-Bliley was a mistake, you testified, ‘‘I don’t think so. I don’t 

think we can go back to a world in which we separate different 

kinds of financial services and say these lines cannot be crossed. 

That wasn’t working very well. We can’t go back to those days. We 

have to figure out how to go forward.’’ 

This week, as you know, the Volcker Rule was promulgated, 

which does precisely that, a rule that asked some 1,300 questions 

in the initial proposal, making it effectively a concept release. As 

a result, the final rule skirted around the notice and comment process. 

Given this history and your thoughts back in 2008, wasn’t the 

Volcker Rule misguided and, at a minimum, shouldn’t it have been 

reproposed before final adoption? 

Ms. RIVLIN. I don’t equate the Volcker Rule with repeal of 

Gramm-Leach-Bliley or going back to Glass-Steagall, and I still 

agree with what I said, that we can’t do that. We have to figure 

out how to regulate this complicated situation that we have without reversing it. 

As I said earlier, I am not a big enthusiast of the importance of 

the Volcker Rule. I think other things, such as capital requirements and leverage ratios and other things, are much more important. 

Mr. ROTHFUS. I thank the Chair, and I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

There are no other Members standing in the queue for questions, 

so at this point, I would like to thank all of the witnesses for your 

testimony today, and especially thank you for your patience with 

rescheduling challenges. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing stands adjourned. 

[Whereupon, at 5:06 p.m., the hearing was adjourned.] 

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A P P E N D I X 

December 12, 2013 

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