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IMPACT OF MONETARY POLICY ON 

THE ECONOMY: A REGIONAL FED 

PERSPECTIVE ON INFLATION, 

UNEMPLOYMENT, AND QE3 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

DOMESTIC MONETARY POLICY 

AND TECHNOLOGY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JULY 26, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–50 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO R. CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON DOMESTIC MONETARY POLICY AND TECHNOLOGY

RON PAUL, Texas, Chairman 

WALTER B. JONES, North Carolina, Vice 

Chairman 

FRANK D. LUCAS, Oklahoma 

PATRICK T. MCHENRY, North Carolina 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

NAN A. S. HAYWORTH, New York 

DAVID SCHWEIKERT, Arizona 

WM. LACY CLAY, Missouri, Ranking 

Member 

CAROLYN B. MALONEY, New York 

GREGORY W. MEEKS, New York 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GARY C. PETERS, Michigan 

(IV) 

C O N T E N T S 

Page 

Hearing held on: 

July 26, 2011 ..................................................................................................... 1 

Appendix: 

July 26, 2011 ..................................................................................................... 29 

WITNESSES 

TUESDAY, JULY 26, 2011 

Hoenig, Dr. Thomas M., President, Federal Reserve Bank of Kansas City ....... 6 

APPENDIX 

Prepared statements: 

Paul, Hon. Ron .................................................................................................. 30 

Hoenig, Dr. Thomas M. .................................................................................... 32 

(1) 

IMPACT OF MONETARY POLICY ON 

THE ECONOMY: A REGIONAL FED 

PERSPECTIVE ON INFLATION, 

UNEMPLOYMENT, AND QE3 

Tuesday, July 26, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON DOMESTIC MONETARY

POLICY AND TECHNOLOGY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:12 p.m., in room 

2128, Rayburn House Office Building, Hon. Ron Paul [chairman of 

the subcommittee] presiding. 

Members present: Representatives Paul, Jones, Lucas, Luetkemeyer, Huizenga, Schweikert; Clay, Maloney, and Green. 

Ex officio present: Representative Bachus. 

Chairman PAUL. This hearing will come to order. Without objection, all members’ opening statements will be made a part of the 

record. 

I want to welcome our witness today, President Hoenig. 

And I will begin the hearing with my opening statement. 

Over the years, I have been interested in the transparency of the 

Federal Reserve (the Fed), and the Fed has been interested in the 

independence of the Fed. But since I know what Mr. Hoenig is interested in, I think he truly represents the right kind of independence that I like, because he is a rare individual to be at the Fed, 

or on occasion to be a member of the FOMC. 

But I want to note that last year when virtually everybody was 

endorsing and welcoming QE2, he was dissenting against this position, I believe, about 8 times. So that to me is truly remarkable 

and shows that he is, obviously, an independent thinker. 

My interest, of course, in the monetary system has been related 

to the accumulation of debt. I believe they are related and that the 

size of government is indirectly affected by monetary policy as well. 

If debt can be easily monetized, the temptation for Congress to 

spend money is always there. And I think that is a big, big distortion. 

Mr. Hoenig has made his points made very clear, that maybe interest rates of 0 to 0.5 percent might be too much, and he actually 

has made statements about part of our problem prior to the crash 

of 2008 was the fact that interest rates were too low for too long. 

2 

And I often think about and like to clarify and expand as much 

as possible the relationship of the problems that we have today to 

our privilege of issuing the reserve currency of the world. 

Obviously, nobody has quite that same benefit. And, therefore, 

our debt and our bubbles can get far more exaggerated than if you 

are an independent country and your debt is numbered in a currency that the world doesn’t accept like they accept our dollars. 

So though that might be a very positive thing in the short run, 

and give us some benefits, it also may be misleading to us, because 

it is deceiving us into thinking that this process can go on forever. 

Today, we are in the middle of a default crisis. We are worrying 

about whether the national debt is going to be increased. 

And I have an opinion that once the debt gets so big, default is 

virtually impossible to stop and that the default that we are worrying about right now is not strange and brand new, because in 

many ways, our country has already defaulted. 

If you look at our inability to follow up on the promises to pay 

a gold certificate in the 1930s, that was a form of default. And 

then, we promised to pay foreigners gold for $35, and we eventually 

had to quit doing that. 

We promised to pay the American citizens a dollar for a silver 

certificate, and we defaulted on that. And eventually, those silver 

certificates were not worth a silver dollar, but they were then 

worth a Federal Reserve Note. 

And even in 1978, we met a major crisis. It was a dollar crisis, 

and we were not able to maintain the value of the dollar. And we 

went hat in hand to the IMF and actually got approximately $25 

billion to $30 billion of boost to prop up our dollar at that time. 

So for me, that is a form of default, and I believe we have embarked on a system where default is going to come. And I think the 

argument and the impasse is because nobody wants to really admit 

that the default is here, and we have to face up to it. 

The argument is, how do we default? Are we going to quit sending the checks out, or are we going to do the ordinary thing that 

countries have done for years and that we continually do, and that 

is, we pay off our debt with money with a lot less value. 

To me, that is a default, but I see that as being unfair, because 

some people suffer more than others. And, therefore, we will eventually be pushed into some serious talks about monetary reform, 

which I believe are actually occurring already in international circles. 

But my 5 minutes has expired. 

And now, I will yield 5 minutes to Mr. Clay. 

Mr. CLAY. Thank you, Mr. Chairman. And thank you for conducting this hearing on the impact of monetary policy and the state 

of the economy. 

The Full Employment and Balanced Growth Act of 1978, better 

known as Humphrey-Hawkins, set four benchmarks for the economy: full employment; growth in production; price stability; and the 

balance of trade and budget. 

The Humphrey-Hawkins Act also charges the Federal Reserve 

with a dual mandate: maintaining stable prices; and promoting full 

employment. 

3 

According to the Department of Labor, in June, the Nation’s unemployment rate was 9.2 percent. Over 14 million Americans are 

looking for work. Another 5 million are underemployed at jobs that 

pay much less than they previously earned, and offer few benefits. 

And in urban areas like the district that I represent in St. Louis, 

the unemployment rate among African Americans and other minorities is over 16 percent. 

The Majority party has been in power in this House for over 200 

days, and yet we have not seen one jobs bill, and America is still 

waiting. 

I am eager to hear what additional steps the Federal Reserve is 

willing to take to free up the flow of credit to small businesses and 

to encourage major banks to finally invest in this recovery, instead 

of sitting on the sidelines with trillions of dollars that could be creating millions of jobs. 

I also look forward to the witness’ comments regarding what 

other urgent steps Congress can take to spur private sector job 

growth and restore confidence in our economic future. 

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

Chairman PAUL. I thank the gentleman. 

Now, I yield to Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. Thank you, Mr. 

Chairman, for holding this hearing today and for continuing the 

dialogue. 

I first want to recognize today’s witness. President Tom Hoenig 

has been a voice for reasons and fiscal conservatism during a time 

when many of our economic policies have been weak. 

Tom has often been a lone dissenter who has encouraged sound 

economic principles over politically expedient ones. Our Nation is 

grateful for his service. 

President Hoenig has expressed concern over Federal Reserve 

monetary policies. Personally, I remain troubled by the expansionary role the Fed seems to have been championing over the last 

several years. What is more upsetting is the fact that we don’t 

seem to be any closer to changing course and abandoning these 

policies, even though they don’t seem to have worked. 

While a Federal program of quantitative easing looms, our economy remains stagnant. Our jobless rate continues to hover above 

9 percent. Bank lending is still constrained. And we have seen little evidence of a long-term economic growth. 

Abroad, the credit markets have indicated that austere measures 

are being taken by troubled governments. We are headed down an 

identical path. 

Since 2008, the Fed has purchased several trillion dollars of U.S. 

treasuries, many of which are still held by the bank. We have been 

warned time and time again that unless we get our fiscal house in 

order, our credit rating is likely to be downgraded. Considering the 

amount of treasuries held by the Fed, the solvency of our central 

bank will undoubtedly be affected by this downgrade, should it 

occur. 

The current state of our economy, combined with the problems 

we could face in the near future, results in a recipe for economic 

distress. The Fed must begin to seriously examine the policies in 

4 

place and plan for worst-case scenarios that could overwhelm our 

Nation in the coming months. 

Congress rarely hears from the 12 regional Fed Presidents. This 

is unfortunate, given their role as a financial regulator in our communities and as an independent voting member on the Federal 

Open Market Committee. 

I appreciate President Hoenig’s willingness to be here today, and 

I look forward to his testimony. 

With that, Mr. Chairman, I yield back. 

Chairman PAUL. I thank the gentleman. 

I now yield to Mr. Green from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. 

And Dr. Hoenig, thank you for appearing today, sir. I trust that 

you will find our committee hospitable. 

I think that we have many concerns that we can address. And, 

of course, I am concerned about inflation, concerned about unemployment, concerned about the quantitative easing and the possibility of another round of quantitative easing. 

But I must also say to you, I still believe in America. I really 

don’t want this to come across as, we have lost faith in the country 

that has produced so much for so many. America is still a pretty 

good place to live. A pretty good place to have your dreams, your 

hopes, and your aspirations fulfilled. 

So as I—I will speak for myself—make my queries and make my 

inquiries known, I don’t want to give the impression that I no 

longer have faith and belief in this, the greatest country in the 

world. 

I am concerned, sir, about the widening gap, and I am not sure 

that you can address this, but if you have some intelligence that 

you will share, I would appreciate it, but the widening gap between 

what we commonly call the haves and the have-nots. 

That is a real concern. I have seen some information published 

indicating that Latinos, African Americans and Asians have had a 

great widening in the gap between these groups and some others. 

That concerns me. 

I am also concerned about this crisis that you have very little 

control over—you may be able to influence it, but little control— 

and that is the raising of the debt ceiling, as we call it. This ceiling 

is something that has become a crisis, but it really is a political 

problem that has somehow evolved into a crisis, a political problem 

that has evolved into an economic crisis, if you will, only because 

the politics have not come together appropriately. 

And I still believe that we will get it right. I think that there is 

still time for us to raise the debt ceiling. 

But these are some of the concerns that I hope you will be able 

to address today from your regional perch. I think highly of you, 

and I am interested in hearing your views. I have a lot of respect 

for you, and I thank you for appearing. 

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

Chairman PAUL. I thank the gentleman. 

Now, I yield to the full committee’s chairman, Mr. Bachus. 

Chairman BACHUS. Thank you, Chairman Paul. 

I commend you for holding this hearing to examine the state of 

the economy from the perspective of a regional Federal Reserve 

5 

Bank President, and I thank you for inviting Governor Hoenig, 

whom I consider to be a superb regional President. 

Tom Hoenig, or Dr. Hoenig, is the longest-serving of the 12 Presidents of the regional Federal Reserve Banks. Perhaps happily for 

him, but sadly for many of us who admire his wisdom, he is soon 

to retire from that post. 

You will be missed. 

Dr. Hoenig has been a steadfast, independent voice among those 

in the inner circle of Federal Reserve Chairman Ben Bernanke, 

and before that, Chairman Alan Greenspan. He has been particularly outspoken recently in cautioning against the overly stimulative efforts of the Fed, including the so-called QE2, quantitative 

easing program that ended last month after adding an additional 

$600 billion in bonds onto the Fed’s balance sheet. 

The New York Times said that Dr. Hoenig’s cautious views were 

clearly shaped by having worked at the Kansas City Fed during 

the runaway inflation of the 1970s and the bank failures of the 

1980s, and ‘‘seem rooted in an agrarian and populist tradition that 

is mistrustful of concentrations of power.’’ 

I think that is a healthy fear. It is not surprising, then, that Dr. 

Hoenig has spoken forcefully on the subject of downsizing the biggest of the country’s large banks, including a 2009 speech he titled, 

‘‘Too Big Has Failed.’’ I can tell you that on this side of the aisle, 

many of us are in wholehearted agreement with you. And we have 

looked on with alarm as there has been a greater and greater concentration of ‘‘too-big-to-fail’’ institutions. 

I mention all this not only to salute you, Dr. Hoenig, for your career and your, I guess, bravery in speaking out, but also to make 

a comparison between your views and the view that is held by 

some in Washington that regional Fed Presidents should not be allowed to vote on monetary policy moves made by the Federal Open 

Market Committee. 

Somehow, this view holds that regional Fed Presidents are captive of big business and the industry, and I can tell that you are 

a very good exhibit against that. In fact, I think that more often 

than not our regional banks are more attuned to Main Street. 

And of course, you are not the only independent thinker among 

the regional Bank Presidents, but your appearance here today will 

serve as a good rebuttal to the view that the Federal Reserve Bank 

Board of Governors in Washington, D.C., need less input from the 

regional Feds and the rest of the country. Actually, they need more. 

So thank you, Doctor. 

And I yield back the balance of my time. 

Chairman PAUL. I thank the chairman. 

And if there are no other opening statements, we will go to the 

introduction of the witness. 

I want to welcome Dr. Thomas Hoenig, who has been the President of the Federal Reserve Bank of Kansas City for the past 20 

years and is the longest-serving policymaker at the Fed. While a 

voting member of the Federal Open Market Committee in 2010, he 

voted against keeping interest rates at zero, casting the only ‘‘no’’ 

vote at all 8 FOMC meetings. 

6 

He has been a vocal critic of the Fed’s zero interest rate policy 

and QE2. He will be retiring in October, having reached the Fed’s 

required retirement age of 65. 

Mr. Hoenig, you are recognized. 

STATEMENT OF DR. THOMAS M. HOENIG, PRESIDENT, 

FEDERAL RESERVE BANK OF KANSAS CITY 

Mr. HOENIG. Thank you, Chairman Paul, and members of the 

subcommittee. I want to thank you for this opportunity to discuss 

my views on the economy from the perspective of a President of the 

Federal Reserve Bank of Kansas City, and, as you said, a 20-year 

member of the Federal Open Market Committee (FOMC). 

The Federal Reserve’s mandate reads: ‘‘The Board of Governors 

of the Federal Reserve System and the Federal Open Market Committee shall maintain long-run growth of the monetary and credit 

aggregates commensurate with the economy’s long-run potential to 

increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest 

rates.’’ 

Within the context, then, of ‘‘long-run,’’ the role of the central 

bank is in fact to provide liquidity in a crisis and to create and foster an environment that supports long-run economic health. For 

that reason, as the financial crisis took hold in 2008, I supported 

the FOMC’s cuts to the Federal funds rate that pushed the target 

range to 0 percent to 0.25 percent, as well as the other emergency 

liquidity actions taken to stanch the crisis. However, though I 

would support a generally accommodative monetary policy today, I 

have raised questions regarding the advisability of keeping the 

emergency monetary policy in place for 32 months with the promise of keeping it there for an extended period. 

I have several concerns with zero rates. First, a guarantee of zero 

rates affects the allocation of resources. It is generally accepted 

that no good, service or transaction trades efficiently at the price 

of zero. Credit is no exception. Rather, a zero-rate policy increases 

the risk of misallocating real resources, creating a new set of imbalances or possibly a new set of bubbles. 

For example, in the Tenth Federal Reserve District, fertile farmland was selling for $6,000 an acre just 2 years ago. That land 

today is selling for as much as $12,000 an acre, reflecting high 

commodity prices but also the fact that farmland loans increasingly 

carry an interest rate of far less than the 7.5 percent historic average for such loans. And with such low rates of return on financial 

assets, investors are quickly bidding up the price of farmland in 

search of a marginally better return. 

I was in the banking supervision area during the banking crisis 

of the 1980s, when the collapse of a speculative bubble dramatically and negatively affected the agriculture, real estate, and energy industries, almost simultaneously. Because of this bubble, in 

the Federal Reserve Bank of Kansas City’s district alone, I was involved in the closing of nearly 350 regional and community banks. 

Farms were lost, communities were devastated, and thousands of 

jobs were lost in the energy and real estate sectors. I am confident 

that the highly accommodative monetary policy of the decade of the 

1970s contributed to this crisis. 

7 

Another important effect of zero rates is that it redistributes 

wealth in this country from the saver to the debtor by pushing interest rates on deposits and other types of assets below what they 

would otherwise be. This requires savers and those on fixed incomes to subsidize borrowers. This may be necessary during a crisis in order to avoid even more dire outcomes, but the longer it continues, the more dramatic the redistribution of wealth. 

In addition, historically low rates affect the incentives of how the 

largest banks allocate assets. They can borrow for essentially a 

quarter-point and lend it back to the Federal Government by purchasing bonds and notes that pay about 3 percent. It provides them 

a means to generate earnings and restore capital but it also reflects 

a subsidy to their operations. It is not the Federal Reserve’s job to 

pave the yield curve with guaranteed returns for any sector of the 

economy, and we should not be guaranteeing a return for Wall 

Street or any special interest groups. 

Finally, my view is that unemployment is too high today, in part 

because interest rates were held to an artificially low level during 

the period of the early 2000s. In 2003, unemployment at 6.5 percent was thought to be too high. The Federal funds rate was continuously lowered to a level of 1 percent in an effort to avoid deflation and to lower unemployment. The policy worked, but only in 

the short run. 

The full effect, however, was that the United States experienced 

a credit boom with consumers increasing their debt from 80 percent 

of disposable income to 125 percent. Banks increased their leverage 

ratios—asset to equity capital—from 15-to-1 to 30-to-1. This very 

active credit environment persisted over time and contributed to 

the bubble in the housing market. In just 5 years, the housing bubble collapsed and asset values have fallen dramatically. The debt 

levels, however, remain, impeding our ability to recover from this 

recession. I would argue that the result of our short-run focus in 

2003 was to contribute to 10 percent unemployment 5 years later. 

That said, I am not advocating for tight monetary policy. I am 

advocating that the FOMC carefully move to non-zero rates. This 

will allow the market to begin to read credit conditions and allocate 

resources according to their best use rather than a response to artificial incentives. 

More than a year ago, I advocated removing the ‘‘extended period’’ language to prepare the markets for a move to 1 percent by 

the fall of 2010. Then, depending on how the economy performed, 

I would move rates back towards more historic levels. 

I want to see people back to work, but I want them back to work 

with some assurance of stability. I want to see our economy grow 

in a manner that encourages stable economic growth, stable prices, 

and long-run full employment. If zero rates could accomplish this 

goal, then I would support interest rates at zero. 

Monetary policy, though, cannot solve every problem. I believe 

we put the economy at greater risk by attempting to do so. 

Thank you, Mr. Chairman, and I do look forward to the committee’s questions. 

[The prepared statement of Dr. Hoenig can be found on page 32 

of the appendix.] 

8 

Chairman PAUL. I thank you for your statement, and I would 

note that without objection, your written statement will be made 

a part of the record as well. 

Mr. HOENIG. Thank you. 

Chairman PAUL. I would like now to yield to Mr. Bachus for any 

questions he would like to ask. 

Chairman BACHUS. I thank the chairman. 

Dr. Hoenig, as I said in my opening statement, you have been 

firmly outspoken about monetary policy decisions. 

The Fed recently issued guidelines on how and when Federal 

Open Market Committee members should discuss or could discuss 

monetary policy decisions. Do you view this as an attempt to control the message or to stifle dissenting voices? 

And probably more importantly, Chairman Bernanke has promised a more open Fed, a more transparent Federal Reserve. And 

these guidelines, at least to me, seem a little inconsistent with restrictions on your ability to speak out. But I would like to know 

your views on that. 

Mr. HOENIG. I hope not. I think part of the reason for the guidelines are that there were instances, frankly, where I would wake 

up on a Thursday morning and find what the future policy might 

be in the Wall Street Journal, not having known about it. And I 

think I raise objections to those kind of leaks and ask that they be 

vigorously pursued, to be quite frank. So I hope that is the reason. 

Secondly, my approach is that I speak publicly, on the record. I 

try not to speak off the record, so that there isn’t any confusion. 

And so when I come here, or wherever I go, I speak my views. I 

don’t consult with the Board of Governors. I don’t ask permission. 

I have until October, I realize, but I have never done so, and if I 

were staying on, I wouldn’t do so in the future. 

So I think it is a matter of personal choice. I don’t think any of 

the members should disclose confidential information or leak to the 

media in advance. I strongly object to that, and I would have every 

intention to speak on the record my views publicly, regardless of 

what that statement might otherwise say. And I don’t think that 

statement prevents me from doing so. 

Chairman BACHUS. Good, so the guidelines are more designed to 

keep unauthorized releases and releases that aren’t a part of the 

public record? 

Mr. HOENIG. That is the context in which they came up. 

The fact that they are there, I think could have the effect of stifling some, but I think that is a matter of someone saying, ‘‘I have 

spoken to this. This is my view,’’ and show the leadership to speak 

their views. 

Chairman BACHUS. Okay, good. And I am glad to hear that. I 

think that affirmation—I think Chairman Bernanke has tried to 

have a more open Fed, and I think he has been very candid with 

our committee. 

In your testimony, you used the rapid increase in farmland value 

as an example of, maybe, credit misallocation resulting from what 

you see as a too-low Federal funds rate. Do you see any other bubbles building? 

Mr. HOENIG. I don’t—in fact, when people have asked me about 

the land, I have not said it is a bubble, but I— 

9 

Chairman BACHUS. Oh, yes. 

Mr. HOENIG. But I do say that we have conditions. We have created conditions. Zero interest rates, QE1, QE2 create conditions 

that are amenable to bubbles. 

And where we see asset values moving quickly, one example is 

in the farmland. I think you can see it in other areas, some of the 

bond markets and so forth. And so you have to be aware of that. 

I think my issue is that, when you create conditions for certain 

outcomes, they will eventually arrive unless you withdraw those 

conditions in a timely fashion. And I think that is really the issue 

at hand. 

Chairman BACHUS. Okay. The Fed used to say it specifically did 

not want to use monetary policy to reduce froth in the markets. 

Chairman Greenspan said it in front of this committee any number 

of times, or made that statement. 

But is it appropriate for the Fed to avoid dealing with the buildup of asset bubbles but, on the other hand, conduct monetary policy 

aimed at reflating a market? 

Mr. HOENIG. I think my view is that monetary policy should be 

conducted with a long-term focus, with, if you will, boundaries 

around its discretion, and therefore should not be in a position of 

creating froth in the market any more than it should try and somehow pinpoint some sector of the economy that it thinks is too 

frothy, and try and adjust that. 

So, really, what you have to do is conduct monetary policy towards the long run. It is when you try and fine-tune monetary policy, direct it towards particular sectors, or to offset every shortterm decline in the economy with extensive easing of monetary policy, that you create instability, as likely as deal with it. 

Chairman BACHUS. Thank you. I will come back in the second 

round and ask other—I do want to say this, and I am just throwing 

it out for thought and not asking for a reply now. I have actually 

believed that QE2 gave the Congress an opportunity to—some time 

to move to make some long-term structural changes in our entitlement programs. 

It is an opportunity that, whether it was intended for that purpose or not, it certainly gave us an opportunity, and kept financing 

the debt at a low rate, or lower rate, maybe. But the Congress has 

squandered that opportunity, at least at this time. 

So I do believe that Chairman Bernanke’s job has been made 

harder by the inability of this Congress to make the tough decisions and particularly to make needed structural changes in our 

entitlement programs. And I think we will continue to make problems for the Fed and probably result in inflation ourselves, some 

of our actions. 

So, thank you. 

Chairman PAUL. I thank the gentleman. I yield 5 minutes to Mr. 

Green. 

Mr. GREEN. Thank you. 

Again, I thank you for appearing today, sir. 

Let us start with the debt ceiling. And if you could, be as terse 

as possible, because I have a couple of other questions. Can you 

give your opinion as to the consequences of our failure to raise the 

debt ceiling? 

10 

And if you can be brief, I would appreciate it, although I know 

it is impossible on this question. 

Mr. HOENIG. The failure to address your budget issues is an action. It is a choice. And the consequences of doing that are to add 

to the uncertainty in the economy. So the effects will be, I think, 

in that sense, adverse. 

I think the economy would do well with addressing the budget 

crisis and the budget problems and providing more stability and 

more certainty. 

Mr. GREEN. In your opinion, would it be better to not raise the 

debt ceiling or to raise it and have it done in what we call a clean 

fashion—if it were those two choices? 

I know there are many others, but is it better to raise it and 

have a clean raising of the debt ceiling, as opposed to not raise it 

at all? 

Mr. HOENIG. The only answer I can give you to that is you really 

need—that is the Congress’ area of responsibility— 

Mr. GREEN. But I am talking about the consequences. 

Mr. HOENIG. But you need to deal with it as forthrightly as possible. 

Mr. GREEN. I understand, but are the consequences more severe 

if we don’t raise it than if we raise it with a clean ceiling? 

Mr. HOENIG. I think the consequences are there regardless. It is 

a matter of the timing of the consequences and how you want to 

accept those— 

Mr. GREEN. So in your opinion, it could be just as bad to raise 

the debt ceiling as we have done in the past, just have a clean raising of the debt ceiling. That would be just as bad as not raising 

it at all? 

Mr. HOENIG. I don’t know what the consequences will be any 

more than anyone else does. 

Mr. GREEN. I know, but you are in the business of prognosticating, because that is what you do to decide whether you should 

raise it the 1 percent that you are talking about here. 

Mr. HOENIG. If you want my prognosis, honestly, I think what 

you need to do is address the budget crisis. 

Mr. GREEN. I understand, but I am not ready to go there, you 

see. I am giving you a set of circumstances and I am asking you, 

if you would, to address this set of circumstances. 

I know what you would like to do. I have been reading a little 

bit, here, and I understand your point of view. But I am taking you 

out of your comfort zone and—from time to time— 

Mr. HOENIG. But it is not mine to decide. It is yours. 

Mr. GREEN. I don’t want you to decide. I just want you to tell 

me about consequences of not deciding. 

Mr. HOENIG. If you don’t raise the ceiling immediately, then the 

Congress and whomever else has to prioritize its future cash flows. 

If you do raise it, you also will have to prioritize it over time. In 

either case, you have— 

Mr. GREEN. Let us go to another area, because— 

Mr. HOENIG. —you have to make choices. 

Mr. GREEN. I understand. My time is about up. Let me go to another area quickly. 

11 

You wanted to prepare the market for a 1 percent increase by 

the fall of 2010. Is that a fair statement? 

Mr. HOENIG. Yes. And that was in an earlier part of 2010. 

Mr. GREEN. Okay. All right, I understand the circumstances were 

different than now. But if we had done this, we had prepared the 

market, as you had hoped we would, what were your thoughts in 

terms of what would occur? 

Mr. HOENIG. Interest rates would still be at historic low levels. 

Monetary policy would continue to be highly accommodative, but 

yet you would be off of zero. You would be no longer pumping enormous amounts of liquidity into the market. 

And the market would know. Right now, the market—what you 

are doing is you are at zero. So you are creating—the market is adjusting to zero, in all its allocations, in its investments, in its bond 

funds, in its land, around an equilibrium of zero. 

I think most people acknowledge that zero is not sustainable. So 

the longer you allow that to continue, the longer you allow that allocation of credit and assets around zero, the more fragile the equilibrium and the sharper the consequences when you finally do remove that zero. 

And I think, the more— 

Mr. GREEN. I wanted to have a quick follow up, because I only 

have 30-plus seconds. 

You do agree that we don’t have as much lending now as we 

need for the economy to recover. And if we don’t have that lending 

at zero, what would be the circumstance at 1 percent? 

Mr. HOENIG. I don’t think that the issue around lending is related to the immediate policy of the Fed funds rate being zero. It 

is around the issues of the fiscal uncertainty. It is around the 

issues of whether we have a resurgence of manufacturing in this 

country that is sustainable. It is around the issues of how we create goods, because it is the creation of goods and services that 

brings jobs in. 

And I don’t think that the marginal choice for most businesses 

around whether they would do this of zero or a half a percentage 

point or 1 percentage point is the deciding factor in that instance. 

Mr. GREEN. My time is up. 

And you have been very generous, Mr. Chairman. I thank you. 

And I will wait for a second round. 

Chairman PAUL. Thank you. 

Mr. GREEN. And I will follow up. 

Chairman PAUL. I thank the gentleman. 

I will now take my 5 minutes. 

I want to talk about the relationship of Federal Reserve policy 

and monetary policy with the debt increase. We all know that the 

Federal Reserve is the lender of last resort. The economy gets into 

trouble, liquidity dries up, the Fed is supposed to be there to help 

out. 

But could it be that this concept of lender of last resort contributes to the deficit problem? And what I am thinking about here is 

that politicians, we in the Congress, get pressure from a lot of 

areas to spend money. And sometimes spending money helps us get 

reelected. 

12 

So, there are a lot of domestic needs, needs in our districts. And 

also, there is a lot of activity around the world, both violent and 

non-violent, that requires a lot of money. 

And in the inflationary part of the cycle when things seem to be 

going well, it is very tempting for Congress to spend a lot of money. 

But if the Fed is always there to keep interest rates low, doesn’t 

that just encourage us? Congress generally is undisciplined, but 

doesn’t the policy feed into this? Because if the Fed didn’t do this, 

if they weren’t our lender of last resort and interest rates started 

bumping up, we couldn’t blame the Fed for our problems, we would 

have to blame ourselves—high interest rates—because we are sucking up all the credit. 

Do you see a relationship between Fed policy and the encouragement or allowing Congress to spend more than they should be? 

Mr. HOENIG. I think there is always the danger that the central 

bank can be put in the position of buying the government’s debt. 

That is why you have an independent central bank and why the 

independent central bank has to pursue long-run monetary policy 

geared towards what the basic money-based requirements and 

needs are for the growth of that economy. 

And it does require not only that the Congress be disciplined, but 

that the central bank be disciplined as well and not allow themselves to get drawn into that, yes. 

Chairman PAUL. But in a way, doesn’t your testimony verify that 

maybe the Fed didn’t do their job because they kept interest rates 

too low for too long, and we were part of the problem. So how do 

you protect against that, if the Fed is as fallible as the Congress? 

Mr. HOENIG. There is no system that is infallible. Whether it is 

the central bank doing this or the Congress doing it, there is no 

system that is infallible. 

Yes, I think that in the early part of the decade of the 2000s— 

as I have said many times—the policy was kept too accommodative 

for too long. The consequence of that was to create a credit bubble. 

It affected not only the Congress, but, of course, the credit markets 

generally became very active. 

That is why we had the tremendous expansion in credit in housing and later the consequence. That is an area that we have to 

learn from and go forward from. I don’t think it is directly related 

in terms of the Congress and the debt, but it is related to the economic conditions broadly and the expansion of monetary policy during that period. And I think we have to be careful and mindful of 

that as a central bank. 

Chairman PAUL. I would agree that no system is infallible, but 

it seems like we might get better information from the marketplace, dealing with interest rates. Prices are very important in the 

economy, and nobody is out there advocating wage and price controls. We have tried it and, hopefully, they never bring that back 

again. 

But in a way, aren’t we dealing with a price control and you are 

looking for the price of money, the cost of money? I think you talk 

about that, that the cost was too low. And it causes a misallocation 

of resources. So how do you know what the right price is? 

Mr. HOENIG. I agree that you need to have a disciplined monetary policy that has a range. Our long-term growth over this decVerDate Nov 24 2008 15:29 Sep 26, 2011 Jkt 067945 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\67945.TXT TERRIE
13 

ade has been about 3 percent real growth. Our policy should be 

mindful of that as we conduct monetary policy going forward. 

And when we do go to zero and leave it there for an extended 

period, in reaction to a crisis, that is one thing. If we leave it there 

on a continuing basis, we do increase the risk that we misprice 

credit and misallocate resources, yes. 

Chairman PAUL. It seems like it is a contest between confidence 

in the market setting the price or the interest rates versus somebody dealing with monetary policy. And some of us have come to 

the conclusion that we like the market to set that. We would like 

to see maybe the retirees get more for their CDs. 

Mr. HOENIG. Right, and I understand, but the market makes terrible mistakes as well. And the market is responsible because it 

gets, if you will, euphoric in a direction, creates its own bubble 

around credit, because we are a fractional reserve system. It crashes. The market itself isn’t prefect either. It causes— 

Chairman PAUL. My time is up, but we are going to have a second round, and I want to ask about the fractional reserve system. 

Mr. HOENIG. Okay. 

Chairman PAUL. And now, I yield 5 minutes to Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

And welcome to my fellow Missourian. 

Mr. HOENIG. Thank you. 

Mr. LUETKEMEYER. Dr. Hoenig, it is good to have you here. 

Mr. HOENIG. Thank you. 

Mr. LUETKEMEYER. Since 2008, the Fed has purchased several 

trillion dollars worth of U.S. securities, treasury bills. And as we 

have seen over in Europe, over there the countries, in order to get 

their debt sold, have had to go to some very austere measures, 

sometimes go back 2 or 3 times to review their plans. Every time 

their interest rates have gone up in order to be able to accommodate them. 

We are being told by the credit markets that if we don’t do something within the next couple of weeks here, we are going to have 

our securities downgraded. How does that affect the solvency of the 

Federal Reserve to have all of those securities that they are holding all be downgraded suddenly? 

Mr. HOENIG. It depends on how the markets view this downgrade. If it is downgraded and it doesn’t affect the market pricing 

on those securities, because they have confidence that the Congress 

of the United States will come to a correct solution on that, I don’t 

think it will have much effect at all on our solvency. 

If the Congress fails to act, it will have a more lasting effect. But 

they are anticipating that the Congress will act. 

Mr. LUETKEMEYER. As a former examiner, I am sure you—it 

would be interesting to have the Fed on the problem list, wouldn’t 

it? 

Mr. HOENIG. Yes. 

Mr. LUETKEMEYER. Along that line, though, the same thing is 

happening with the rest of the banks in this country. If, for instance, we did get downgraded, suddenly now those banks—so your 

local community banks got a whole fistful of U.S. treasuries. And 

now they are being downgraded, and suddenly that affects their 

capital. It affects their rating. 

14 

How would you view that situation then—again, as a former examiner—the calamity that would happen to our local community 

banks? 

Mr. HOENIG. If there was a serious effect from the downgrade on 

the pricing of the bonds to where there was capital loss in the 

bank, then of course it would have negative effects. I think the 

question is whether it would be a pricing effect, and I think that 

depends very much on the actions of the Congress. 

Mr. LUETKEMEYER. It is an action that could happen on the part 

of the credit markets to where it could be an increase in risk that 

would have to be assumed there. 

Mr. HOENIG. The failure to act is an action. 

Mr. LUETKEMEYER. Okay. Thank you. 

With regards to—you mentioned a while ago—my time is running out here—let me get to QE3. 

We had Chairman Bernanke in here not too long ago, and he 

wouldn’t say anything about QE3. But since he has been here, he 

certainly has not denied thinking about QE3. And to me, this is a 

devastating situation. 

We have had a number of economists in here since he has been 

here, and every one of them I have asked the same question, ‘‘Do 

you see interest rates going up this fall as soon as QE2 stops 

here?’’ And every one of them said ‘‘Yes, unless you do a QE3, in 

which case you will probably have inflation.’’ 

Would you concur with that or do you have a different opinion 

on that? 

Mr. HOENIG. First of all, I am not a supporter of QE3. I wasn’t 

a supporter of QE2. 

I think, by ceasing QE2, I don’t know that interest rates necessarily will go up significantly. It depends on a whole host of factors in terms of how the economy is doing. It is not just whether 

you stop QE2 over time. I don’t think we should mainly try and 

manage interest rates down. That is kind of the point of my testimony. I think there are consequences of doing that, that 

misallocate resources, and we have to be mindful of that. 

Mr. LUETKEMEYER. Obviously, I agree with that. I am just going 

along that line of thought, that among other things, the Fed’s job 

is to look long term with regards to interest rates, with regards to 

unemployment. 

And to me, this would seem to fit into a QE2, QE3. Where do 

we stop this? At some point, we have to get control of—at some 

point, the economy has to be resilient enough to stand on its own 

two feet. We have to wean them off this. 

If we are going to absorb all the debt that we are incurring—and 

every budget whether it is Democrat, Republican or whomever, we 

have debt out there. Everybody is agreeing we are going to have 

more debt. So we are going to have to have somebody to purchase 

it. And if the Fed doesn’t purchase it, somebody else is going to 

have to. 

Mr. HOENIG. Correct. 

Mr. LUETKEMEYER. And if we get our securities downgraded, risk 

is there, interest rates are going to necessarily go up. So long term, 

how do you manage those monies to see that you can minimize 

that? What would be your idea or a solution? 

15 

Mr. HOENIG. I think that the mandate is a long-term mandate, 

and we need to keep that in mind. And if we do and if we pursue 

a policy that is long-run oriented towards price stability, then the 

economy—a market economy adjusts on its own. 

The market is not particularly brilliant, but it is harsh. It corrects itself when there is a misallocation. And so that is why monetary policy has to look to the long run, provide sufficient liquidity, 

but not try and fine-tune or manage the economy so that markets 

can in fact discipline themselves. 

So we should not be doing QE3. This is my view. There are plen- ty of excess reserves out there on the order of $2 trillion. I think 

that is plenty. Let the markets begin to heal, and let this market 

of ours allocate resources in our economy. And we should not try 

and fine-tune that. 

I think when we do that, we inject instability as well, more likely 

than we do stability. So we have to be very mindful of that. In the 

short run, we can really inject instability. We have to have a longrun focus. And that is hard, I realize, but necessary. 

Mr. LUETKEMEYER. Thank you for your comments. 

And thank you for your indulgence, Mr. Chairman. 

Chairman PAUL. I thank the gentleman. 

I recognize Mr. Lucas for 5 minutes. 

Mr. LUCAS. Thank you, Mr. Chairman. 

Doctor, as you are well aware, of course, I live in the great Kansas City district in western Oklahoma. And about the time you 

were out doing all that hard work in the early 1980s, I was a senior at Oklahoma State. And I will always think of my father’s lecture in the spring of 1982 when I would occasionally go to land 

sales with my grandfather: ‘‘Keep your hands in your pockets and 

your mouth shut.’’ 

It was wonderful advice in 1982. The reason I bring that up is 

we are now dealing with a set of circumstances here that you have 

discussed and touched around the edges that in some ways is reminiscent of those early 1980s. You remember, and sometimes there 

is an occasional view here that nothing is interconnected, that we 

are all little islands in the world. 

You remember when Penn Square Bank went down, an energyconcentrated banking establishment, which then took down, directly or indirectly, Continental Illinois in Chicago, took down 

Seafirst in Seattle, took down two major, historic long-term players. 

Partly that, in my opinion, and you can offer yours and I would 

be pleased to hear it, as a result of perhaps misguided fiscal policy 

by Congress and perhaps misguided monetary policy by the Fed in 

that late 1970s and early 1980s period. But it had a devastating 

consequence, and it wasn’t just Oklahoma that imploded. We 

sucked people under with us. 

I guess that brings me to my real question, and whatever comments you would care to offer. As my colleagues have alluded to, 

with the Fed balance sheet at a little under $3 trillion now, and 

even by a Texan’s definitions, Mr. Chairman, that is a lot of money. 

It took us 15 years to recover from the agriculture and the energy sector hangover from credit that started in 1982. In my opinion, in my quadrant, it was 1997 before the ship righted itself. 

16 

Three trillion dollars is a whole lot more credit than Penn 

Square was manipulating. When the right policy decisions are 

made, how long is it going to take this credit hangover to clear? 

Mr. HOENIG. Let me first comment. I was on the discount window on Penn Square and was part of the group that recommended 

against lending against Penn Square. And I think it was the right 

decision there, although the consequences, as you said, were very 

harsh. 

Mr. LUCAS. And for the record, a few officers of Penn Square did 

go to the Federal penitentiary. It was more than just a few bad decisions. 

Mr. HOENIG. They did. Absolutely. 

To your question of the degree of liquidity, the amount of time 

it will take to bring the liquidity off our balance sheet, the $3 trillion, I think, is reasonably a period of years. 

Because we have brought this on, I think if you bring it out too 

sharply, you will shock the economy. And in our last minutes, the 

Open Market Committee talked about how they would go about 

doing it in terms of rates and no longer renewing their debt instruments. 

But even under those, it will take years. How many years? It depends on how the economy does. It depends on what the roll-off of 

these instruments, the speed of the roll-off of these instruments 

and whether we choose to sell those. I don’t know how long, other 

than I know it will take years, and there are risks to doing that. 

And that is my point about zero interest rates and creating what 

I call ‘‘fragile equilibriums’’ around this very liquid policy that 

when you finally do begin to move has a negative effect, a negative 

consequence on the economy, both nationally and regionally. And 

that does get my attention. 

Mr. LUCAS. Is it a fair statement to say, Doctor, that, of course, 

we will make a decision at some point. We will, at some point, I 

hope, achieve a consensus. We have legitimate disagreements within the ranks of the House over what the right policy is. 

Mr. HOENIG. Right. 

Mr. LUCAS. That is the nature of the body. But at some point, 

we will arrive at something. If we make the wrong decision, whatever decision we come to, are the consequences as frightening as 

I suspect they are? 

Mr. HOENIG. Any time— 

Mr. LUCAS. Without commenting on any particular decision. 

Mr. HOENIG. Right, anytime you make a wrong decision, there 

are usually negative consequences. And if you make the wrong decision, there will be negative consequences, whatever that is. 

Mr. LUCAS. And the financial markets are sophisticated enough 

that they will respond moment by moment with whatever policy 

decisions we make, and will, as prudent money managers, use 

what I would define from an Oklahoma perspective as ‘‘defensive 

policies’’ if they need to. And that will ripple, too. 

Mr. HOENIG. The greater the uncertainty you create, the more 

defensive the actions will be. That much we can be sure of. 

Mr. LUCAS. Thank you, Mr. President. 

Thank you, Mr. Chairman. I yield back the time that I have left. 

Chairman PAUL. I thank the gentleman. 

17 

We will go ahead and start a second round of questioning. 

If we look at the markets in the last couple of weeks, in light of 

all the conversation about whether or not the debt limit will be 

raised, my estimation or my observation is that the markets aren’t 

that worried. Would you agree with that? Or do you think the markets are showing problems, or at least potential problems? 

Mr. HOENIG. To this point, I think the markets at least strike me 

as having the view that there will be a solution. And as long as 

that view is in place, they will tend to stay calm. If they lose that 

or if they begin to see more instability, more uncertainty around 

it, and therefore actions, then they would—as I said earlier—take 

more defensive actions. 

But right now, I think they have confidence in you, the Congress, 

and the President to come to some kind of agreement. 

Chairman PAUL. In monetary history, it has been said that when 

countries get to a certain level of debt, they have a lot of trouble, 

and the debt eventually has to be liquidated. I personally think we 

are at that point, so there will be liquidation of debt. 

As a matter of fact, free market individuals recognize that 

whether it is government debt or whether it is private debt, liquidation actually serves a purpose in order to get back to square 

one and have economic growth again. 

When we liquidate debt, I believe I mentioned in my opening 

statement, you can do it in two different ways. You can just default, which great nations don’t do. Small nations will. But we are 

nowhere close, I believe, to doing that. I don’t believe that for a 

minute. 

But I do worry about the other part. I worry about the liquidation of debt, because if it is inevitable that the debt will be liquidated and what we do may be prolonging the agony, that is what 

I worry about, that instead of allowing the liquidation and rapidly 

getting back to square one like we did in 1921, that we prolong 

this, such as Japan did and such as we did in the 1930s. 

Do you agree with that? Do you have concerns that liquidation 

will come in the form of inflation? And if you want to prevent that, 

what are your other options, if we are not going to default on our 

payments, which of course, I don’t believe we will? 

Mr. HOENIG. First of all, I agree with you. I don’t think great nations default on their debt. Second of all, I will say that I agree 

with you also, that we have leveraged our economy. 

As I mentioned in my remarks, the consumer has raised their 

debt-to-disposable income from 80 percent to 90 percent to 125 percent. The Federal Government has raised its debt to in gross numbers 100 percent of GDP. So we have increased our debt. 

My concern is that, maybe back to your earlier point, perhaps, 

but when you have that kind of debt, over time there is increased 

pressure on the central banks to help relieve that debt pressure by 

helping finance that debt. 

That puts pressure on the central bank. If they do that, it does 

risk inflationary outbreak, and then you basically repay your debt 

in cheaper dollars. 

Chairman PAUL. But isn’t that— 

Mr. HOENIG. That is a risk, so how do you avoid that? The way 

you avoid that is you take, either through the Congress, through 

18 

special committees, whatever, and develop a long-run plan that 

shows the American people how we are going to deal with our debt, 

Federal and otherwise, but in the Congress, Federal debt, and how 

the debt-to-GDP ratio is going to be brought back down. 

And if it does that in a systematic fashion, with a strong binding 

point, then you will take care of the debt in a responsible way. 

Chairman PAUL. But it seems to me in that attempt, the Fed 

came in and they propped up banks and corporations, that they 

were the ones that have been benefiting from this, and now they 

have been able to get back on their feet again. 

At the same time, it really didn’t help the people. The jobs didn’t 

come back and the people lost their houses. So it seems like it is 

a failed policy to me. 

Mr. HOENIG. I understand your point. My concern is that we 

have in this country allowed to develop ‘‘too-big-to-fail’’ institutions, 

the largest financial institutions, who bulked their assets, and became so important to the economy that any one of them that failed 

would bring down and risk the economy. 

The market understood that and therefore gave them an advantage in terms of their position in the market, lowered their cost of 

capital, and allowed them unfettered access. And when we allowed 

that part, the safety net portion of that to get in with the high-risk 

portion, the investment bank, it only increased that by factors. 

So we do need to address the issue of ‘‘too-big-to-fail.’’ We do 

need to think about how we separate out the safety net from the 

high risk so that the economy can function under a market discipline, or at least more under market discipline, and we would all 

benefit from that. 

Chairman PAUL. My 5 minutes are up, and I now yield to Mr. 

Green. 

Mr. GREEN. Thank you, Mr. Chairman. I will be honored to let 

you have 30 seconds of my 5 minutes, if you need it. 

Let us talk for a moment about lowering the debt-to-GDP ratio. 

Do you agree that there is more than one way to do it? 

Mr. HOENIG. Of course. 

Mr. GREEN. Do you agree that cutting is a way to do it? 

Mr. HOENIG. You can grow your economy— 

Mr. GREEN. Grow the economy. You could also increase revenue. 

Mr. HOENIG. Of course. That is up to the Congress, how they— 

Mr. GREEN. I understand. But I just want you to be on the record 

indicating that we have more than one way to do it. 

Mr. HOENIG. Right. And every choice has a consequence. 

Mr. GREEN. Every choice has consequences. And not making a 

choice at all has its consequences as well. 

Mr. HOENIG. That is a choice. 

Mr. GREEN. Yes, sir. 

Let us move to another area. You talked about markets and the 

market being calm. You do agree that the markets, generally 

speaking, don’t like big surprises. When you give the market a big 

surprise, it has a reaction to a surprise. If you lead the market to 

believe that you are going in one direction, and if you go in another 

direction, then the market responds. 

Mr. HOENIG. Correct. 

19 

Mr. GREEN. I think one of the best examples of this occurred when we had the $700 billion TARP vote, and the market anticipated one thing, and when the vote went another way, we saw the 

market spiral downward. You recall that, I am sure. 

Mr. HOENIG. Sure. 

Mr. GREEN. So you agree that markets don’t, generally speaking, 

want to be shocked with surprises. 

Mr. HOENIG. Correct. 

Mr. GREEN. Okay. If this is true, and you have indicated that the 

market currently believes that we are going to resolve this—and, 

by the way, I pray that we will—but you agree that failure to bring 

about the resolution that the market anticipates will create a reaction in the market. 

Mr. HOENIG. Sure. It certainly will. If the market is thinking one 

thing and you do something else, there will be a reaction. 

Mr. GREEN. One final question— 

Mr. HOENIG. And that also happens on Main Street. 

Mr. GREEN. Yes. And Home Street as well. 

Mr. HOENIG. As well. 

Mr. GREEN. Yes. But let us go back now to your support for the 

0 to 0.25 target. 

Mr. HOENIG. I do not support it. 

Mr. GREEN. You do not support it. But in 2008, you supported 

the cut in the Federal funds rate that pushed us to this target 

range, did you not? 

Mr. HOENIG. I wasn’t voting, but I am sure I would have supported it. Yes. 

Mr. GREEN. Okay. And, by the way, reasonable people can have 

opinions that differ— 

Mr. HOENIG. Absolutely. 

Mr. GREEN. —even on the things that you supported, true? 

Mr. HOENIG. Absolutely. 

Mr. GREEN. And Mr. Bernanke, whom I happen to think highly 

of and I have a great deal of respect for, and he has opinions that 

are very well-respected, and there are other members of the board 

with opinions, and you meet and you confer and you vote, and then 

you come to conclusions. 

Mr. HOENIG. Correct. 

Mr. GREEN. So at the time what you were trying to do was provide what I am going to call a soft landing. Is that a fair statement, 

that we didn’t want the economy to just crash? 

Mr. HOENIG. Well— 

Mr. GREEN. We wanted it to land a little bit softer than if we 

had done nothing at all. 

Mr. HOENIG. ‘‘Soft landing’’ is a generous term. I think we did 

want to avoid a crash and depression, yes. 

Mr. GREEN. Yes, a crash and a depression. 

And if you say that you wanted to avoid it, it says to me that 

you are of the opinion that had we not acted, there could have been 

a crash and a depression. 

Mr. HOENIG. Counterfactuals are always there, and that is a possibility, yes. 

Mr. GREEN. And counterfactuals are hard to prove. 

Mr. HOENIG. Right. 

20 

Mr. GREEN. But the reason you acted the way you did was because there was this concern—and I am being kind by saying ‘‘concern,’’ because there are a lot of other ways to connote what was 

happening—but there were these concerns that we were headed for 

something close to a crash or a depression. 

And your actions, probably if you were to write a book, you would 

say that your actions helped to avert this, would you not? 

Mr. HOENIG. If you are speaking of our movement to zero interest rates and the liquidity we provided, yes, sir. 

Mr. GREEN. Yes. Yes, that liquidity was helpful. 

Mr. HOENIG. Yes. 

Mr. GREEN. And just as it is difficult to prove a counterfactual 

as it relates to what you did, it is equally as difficult to prove it 

with reference to what Congress has done. Do you agree? 

Mr. HOENIG. I assume so, yes. 

Mr. GREEN. Okay. All right. What I am trying to do is establish 

this, sir. People of good will, and I consider you a person of good 

will, acted at a time of crisis— 

Mr. HOENIG. Correct. 

Mr. GREEN. —a time when it appeared as though we were about 

to go over the edge into an abyss unlike many of us had seen in 

our lifetimes. 

And many of these things that we did, we won’t be able to prove 

that we averted a great cataclysm, but we can surely conclude that 

what we did probably helped to avoid a rougher landing, a harder 

landing than we had. 

Mr. HOENIG. Right. 

Mr. GREEN. I want to thank you, Mr. Chairman. I will yield back 

the balance of my time. 

Chairman PAUL. Thank you. I thank the gentleman. 

I will yield to Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Dr. Hoenig, I have been watching what is going on over in Europe very carefully, and it is very concerning to me. And I know 

that in discussing this issue with a couple of other Fed members— 

board members—they don’t seem to be quite as concerned about it 

as I am, so maybe I am an alarmist here. I don’t know. 

But I certainly see a contagion there that could easily spread to 

this country, especially whenever you look at our banks having 

about $1.3 trillion loaned to the various governments, invested in 

bonds of the various governments over there as well as, now, DoddFrank tying all those big banks together with ‘‘too big to fail.’’ 

It looks like there is a lot of connectivity between all of these 

things here. And you look at a line of dominoes, and it looks like 

we are in that line of dominoes. 

So I know that the Fed has a swap line with the European central bank and perhaps some other reserve banks over there as well. 

And I am just wondering what your view is of that situation, how 

concerned are you? 

Mr. HOENIG. I am concerned—do you mean about the European 

situation? 

Mr. LUETKEMEYER. Yes, the European situation and how it will 

affect us or what kind of exposure we might have, our monetary 

policy, how it interacts. It is kind of a big question, but— 

21 

Mr. HOENIG. I understand your concern. The issues around those 

countries that keep coming up are also really around the banks, 

the European banks, because they, obviously, have exposure there. 

And that is a big part of the efforts we are trying to do to resolve 

this. 

And like the United States, as I read it—and I only know from 

what I read in the paper—they are working toward some kind of 

solution, resolution around that. 

But I think it proves to me not only in the United States, but 

internationally that we have institutions that are ‘‘too big to fail.’’ 

And that is what this is really about. We have taken the market 

discipline away. We are now working with institutions globally that 

are extremely important to those economies, to our economy. 

And to me, the whole issue continues to be around institutions 

that are so large that their own difficulties have broad effects on 

the economy, and that makes them ‘‘too big to fail’’ and therefore 

forces, if you will, governments to come in and bail them out. 

And that is really what, I think, is going on in Europe and that 

is really what has gone on in our crisis in the United States. 

Until we change that formula, until we break those institutions 

up into those that are under the safety net and those that are allowed to engage in high-risk activities, we will have these crises periodically into the future—not right away, perhaps, but in years to 

come. 

Mr. LUETKEMEYER. And the pitfall there is that we have our taxpayer dollars at risk, because we are backing these ‘‘too-big-to-fail’’ 

folks. Is that right? 

Mr. HOENIG. When you put a safety net over them and put the 

government’s implied or explicit guarantee, the taxpayer is the 

backstop, yes. 

Mr. LUETKEMEYER. In your position—and you are an economist, 

and having dealt with all of the financial things over the last several years, what do you see as the biggest concern to our economy 

today, whether it is international problems here we just discussed 

or oil prices or our monetary policy, our wars or— 

What do you see as the biggest concern and how we can go to 

it from a financial aspect there? 

Mr. HOENIG. That is a pretty important question. 

Number one, I think that as far as our financial system goes, I 

continue to believe that ‘‘too big to fail’’ is an area that needs to 

be further addressed, and these institutions need to have their risk 

better divided between what is under the safety net and what is 

not. 

Number two, I think that the budget crisis in the United States 

is important because it is drawing all of our attention into that. 

And yet the economy is in difficulty and we should be thinking 

about our policies, do we want to see if we can bring greater manufacturing onshore? 

In 1960, 25 percent of our GDP was contributed by manufacturing. Today, it is 12.5 percent. We have 14 million people out of 

work. So what is our attitude towards manufacturing? What is our 

attitude towards creating businesses that create things then that 

hire people? 

22 

By not being able to pay attention to that in the Congress and 

elsewhere, I think we are handicapping ourselves in an international, global, competitive market, and we need to pay more attention to it so we have a brighter future. I think that is essential. 

Mr. LUETKEMEYER. I appreciate your comments. My time is up. 

Thank you again for visiting with us today. I always enjoy discussing things with you. I really appreciate your perspective and 

all your hard work as well. I thank you again for your service, sir. 

Mr. HOENIG. Thank you, Congressman. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Chairman PAUL. I thank the gentleman. 

I have another additional question. If you care to stick around, 

you may. 

But I am not going to let you go so easily. I need to find some 

answers. But I am very glad you are here and willing to take our 

questions. 

In your introductory statement, you mentioned that one of the 

responsibilities of the Federal Reserve was to have maximum employment, which sounds like a good idea, and stable prices. 

I would look around and I would say, results aren’t all that good. 

When you look at stable prices of housing, you even brought up the 

subject of unstable prices in farmland. That quite possibly could be 

a bubble. 

I would think that if you looked at bonds in prices, they are very 

unstable. And who knows where that is going. If the market overrides, which I believe is possible, markets are very, very powerful. 

I know the Fed is very powerful, but I also know markets are very 

powerful. 

But also in your statement, I want to get back to it, we talked 

a little bit about this, and you said, ‘‘I have several concerns with 

zero rates. First, a guarantee of zero rates affects the allocation of 

resources.’’ 

To me, I think that is very key and very important, because it 

really brings up the subject that the free market economists are 

very attuned to. 

Ludwig von Mises, in his ‘‘Human Action,’’ talks about this as 

the misallocations and of malinvestment, excessive debt, money 

going into the wrong sectors, like farmland maybe or NASDAQ 

bubbles and houses. 

But he took that and carried it much further. It seems like you 

have part of that philosophy, but not the full philosophy, but you 

are, I am sure, aware of what von Mises says about the Austrian 

theory of the business cycle. 

Mr. HOENIG. Sure. 

Chairman PAUL. How do you look at that? Can you say something favorable about his approach to it? Or can you draw a sharp 

line where interest rates are harmful and know how to divide the 

two? And what is your opinion of the Austrian business cycle theory? 

Mr. HOENIG. I have read ‘‘Human Action.’’ I have a lot of respect 

for von Mises and I have a lot of respect for the Austrian school 

of thinking. I think it has value. 

23 

I understand that when you overinvest, when you leave things 

artificially low and you overinvest you create a correction by doing 

that. There is an action with that. 

My view is that is why central banks have to be mindful. No 

matter what the system is, if you have markets and capitalism, you 

are going to have cycles and you are going to have crises. And what 

you want the central bank to do is address the crises and provide 

over a long period of time a base liquidity of money that allows 

your economy to grow. 

When you move beyond that, when you find the central bank focusing on short-term issues, trying to manage the economy, trying 

to fine-tune it, then you create, if you will, impulses of instability, 

because you are trying to take care of short-run issues instead of 

looking to the long run. 

That is why when I say the duty of a central banker is to think 

long run, and that I think I am in agreement with the Austrian 

school, but I do think there is a role for central banks, as I have 

said. 

Chairman PAUL. I certainly agree with your point. Once they 

overextend, they are into central economic planning, except many 

have accepted the notion that you get into central economic planning earlier than that, at the initial stages of believing that you 

can know what the interest rates should be. 

Maybe you can give me a quick comment on this. Do you think 

the problems in the world today—try to put that in perspective. I 

think it is a very big problem, because I don’t think we have faced 

it quite the same way, because we have a fiat dollar standard, and 

we are the issuers of the reserve currency of the world. 

Do you think that has had an effect on what we are facing, the 

fact that we are issuing the reserve currency in the world, and it 

is much different than anything we faced before? 

Mr. HOENIG. What I think is that the fact that we are the reserve currency is a consequence of decades of very good economic 

policy, the fact that we have had an economy that has grown, become very important to the world, and therefore, its currency has 

become very important. 

I think that is a consequence, something you, as someone also 

said, you have earned. With that is carried a responsibility to look 

to long-run policy. 

And to your point, if you have a gold standard, that is a legitimate alternative monetary base for your economy. But it does not 

eliminate crises. There is gold hoarding, there is positioning, there 

is mercantile practices. You will have crises. 

So it doesn’t matter if it is Congress, it doesn’t matter if it is the 

central bank, it doesn’t matter what the standard is. Good policy 

leads to good outcomes. Bad policy leads to bad outcomes. That is 

what you have to keep in mind. 

Chairman PAUL. I would question whether we earned it or not. 

In some ways I think it was defaulted, because we were the standard. At least we pretended to be a good reserve standard, even 

though we weren’t allowed to own gold. It was an international 

gold standard. 

24 

And then the confidence continued, surprisingly to some people. 

So that is just a matter of an understanding or semantics about 

whether it was earned or we defaulted into it. 

But I have one more question. Because I have been interested in 

the monetary issues, I am delighted that you are here and so willing to visit with us. 

But last week, I learned that gold was not money. So I have been 

able to put that out of my mind. Gold is not money, so I am still 

trying to figure out what money is. And I have asked these questions a lot of times, I have asked the Federal Reserve Board Chairmen over the years. And if I asked about dollar policy, they would 

say, ‘‘We are not in charge of dollar policy.’’ 

They are in charge of creating all this money and regulating interest rates, but they are not in charge of the dollar. The Secretary 

of the Treasury does that. But the Secretary of the Treasury 

doesn’t give me any straight answers. 

What I need to know from you to further my education is, tell 

me what a dollar is and where can I find the definition in our code? 

Mr. HOENIG. The denomination is, I think—or the title was given 

back at just about the founding of our country. It was based on a 

gold standard at that time. 

But money is, as you know, a medium of exchange, deferred 

means of payment and stored value. And as long as the public and 

the world understands that the dollar that is produced by the central bank of the United States, the base money, and then credit 

goes on beyond that, it is money. 

As long as they take it as a medium of exchange, deferred payment and stored value. When that is lost, then it will no longer be 

money. 

Chairman PAUL. But it is a note, it is a promise to pay. Actually, 

you are right about it being— 

Mr. HOENIG. But it fills the three functions of money. 

Gold can do the same thing. And if Congress designated that 

gold was the medium of exchange— 

Chairman PAUL. This is why I am looking through the code, because the code, when I understand it, actually in the early years 

they wrote a dollar into the Constitution like they would write a 

yard, because everybody knew what it was, they didn’t even define 

it, it was so well known. It was 371 grains of silver. 

But that has never been changed, as best as I can tell, and all 

of a sudden now we have a Federal Reserve Note, a promise to pay 

nothing, is now the dollar standard and we can create them at will 

out of thin air. And then sometimes people wonder why we have 

a shaky, rocky economy. 

I will keep looking for the definition of a dollar. But as best as 

I can tell, we have never said a dollar is a Federal Reserve Note. 

And the dollar under the code still says it is 371 grains of silver. 

I yield to Mr. Luetkemeyer. 

Mr. LUETKEMEYER. I just have one follow-up question on something the chairman asked a minute ago with regards to the role of 

currency. 

Because I think one of the consequences of us not doing something to resolve our debt crisis here and then be downgraded, it 

25 

would seem to me to be a step down the path toward allowing ourselves to be no longer the world’s reserve currency. 

With China sitting over on the sidelines watching us twiddle our 

thumbs and waiting for an opportunity to get in the game, this is 

an opportunity. We are stumbling here and allowing them to do 

that. 

What would be your thoughts on that comment? 

Mr. HOENIG. I do think it is a serious matter. I think the U.S. 

currency, the dollar, is the reserve currency of the world and will 

remain so for some time. 

And part of it is, what are your alternatives? You always have 

to ask the question. And the United States, for all of our issues and 

all the debate going on right now, it still has the deepest markets, 

is a market economy, has all the advantages. It has open capital 

markets. China doesn’t have that. Europe has its issues. 

So we still are the dominant economy. However, there is nothing 

guaranteed about that. That can change based upon the policies we 

choose going forward from here, both from a fiscal side and from 

a monetary side and from basically how we choose to have our 

economy operate in terms of the private sector and markets. 

Those will all define the future of us as an economy and therefore the future of us as a nation as a reserve currency. It will be 

what we choose to do. 

Mr. LUETKEMEYER. You just made the case from the standpoint 

that almost by default, we are the reserve currency, because China 

doesn’t have all its ducks in a row yet to be that currency. Europe 

has its own set of problems. And so you look for the safest harbor, 

you look for the strongest economy. We are still there. 

But if we keep twiddling our thumbs here, it could be endangered from the standpoint of the world sort of looking at us and 

saying, ‘‘Those guys can’t get their act together— 

Mr. HOENIG. I agree with that. 

Mr. LUETKEMEYER. —and their economy is stumbling along. 

They don’t have a manufacturing base anymore, and they are going 

to import almost all the oil, which means they are going to be at 

the mercy of the oil companies and the oil cartels around the 

world.’’ 

And all of a sudden our economy is looked at as kind of a shaky 

thing versus a very stable thing. And now, we have those other 

folks coming in there to fill the void. 

And to me this debt debate, one of the sidelights and one of the 

side consequences is that we are going down this road, and nobody 

is thinking about allowing China to get their foot in the door on 

the world currency side. 

It is not going to happen today or tomorrow, but I have heard 

some people project that in 5 or 10 years, if we don’t get our fiscal 

house in order, by that time they will be in a position economically 

where they will have resolved a lot of the issues that you talked 

about, and they may be knocking on the door. 

Mr. HOENIG. I agree. 

Mr. LUETKEMEYER. So what do you see on the horizon for that? 

Mr. HOENIG. I think that the debates that are going on right now 

are about the long-run future of this country—how we choose to 

26 

deal with our debt, how we choose to deal with our economy going 

forward. Those are the debates that are in place right now. 

My point is that monetary policy cannot manage the short run, 

it has to have a long-run focus also. And the Congress and how we 

choose to have our markets operate are choices that lie ahead of 

us. If we don’t choose well, in a generation, I think the answer to 

that question could be different. 

So it is in our power to change this or to keep us on the right 

path, but you have to choose to do it. And these debates are about 

the long run. There is no question about it. 

Mr. LUETKEMEYER. I certainly appreciate your common sense 

and intellectual approach to all of our problems, Dr. Hoenig, and 

I hope that you stay engaged in some aspect— 

Mr. HOENIG. I hope so, too. 

Mr. LUETKEMEYER. —of monetary and fiscal and economic policy 

here. You are too much of a prized jewel to walk away from this. 

So thank you again for your service. 

Thank you, Mr. Chairman. 

Chairman PAUL. Thank you very much. 

We are about to close, but I do have one more short question I 

think you can answer rather quickly. What would be the ramifications if they stripped away the voting rights of the regional Fed 

Presidents from the FOMC? 

Mr. HOENIG. The ramifications would be you would lose an important set of voices in the Federal Open Market Committee. And 

I think it would be a mistake. 

Right now in my region, as I deal with our board, a rancher from 

Wyoming, a bookseller in Oklahoma, a labor leader in Omaha— 

that is all input that comes into the process. I think you would lose 

that voice, and you would lose that input. 

And you can say, make them advisers. But let me just tell you, 

voting and advising are two different things, and they are not even 

close to one another. 

I would just say, since you have asked, I have been there. It is 

not democratic. It is not part of the political process. And my answer has been the selection of my successor will be a process that 

relies on our board, who represent, like I said, a grain dealer in 

Kansas City, an entrepreneur in Denver, a labor leader, a bookseller, a manufacturer, and a rancher from all over our region, six 

of our seven States. 

And they very carefully go through a search, and then it has to 

be approved by the Board of Governors, the political appointees. 

So, to me, that is a very democratic process. And it is in contrast 

to, if you select a Secretary of the Treasury who happens—if you 

are a Democrat and you select a former chairman of Goldman 

Sachs and you are a Republican and you select a chairman from 

Goldman Sachs, that is political, but I don’t know that it is any 

more democratic than our process, and I don’t recommend it. 

27 

Chairman PAUL. I thank you. I thank you for being here. 

The Chair notes that some members may have additional questions for this witness, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to this witness and to 

place his responses in the record. 

This hearing is now adjourned. 

[Whereupon, at 3:37 p.m., the hearing was adjourned.] 

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