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HOW FEDERAL RESERVE POLICIES ADD TO HARD

TIMES AT THE PUMP

HEARING

BEFORE THE

SUBCOMMITTEE ON REGULATORY AFFAIRS,

STIMULUS OVERSIGHT AND GOVERNMENT

SPENDING

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

MAY 25, 2011

Serial No. 112–50

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.fdsys.gov

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director

SUBCOMMITTEE ON REGULATORY AFFAIRS, STIMULUS OVERSIGHT AND GOVERNMENT

SPENDING

JIM JORDAN, Ohio, Chairman

ANN MARIE BUERKLE, New York, Vice

Chairwoman

CONNIE MACK, Florida

RAU ́ L R. LABRADOR, Idaho

SCOTT DESJARLAIS, Tennessee

FRANK C. GUINTA, New Hampshire

MIKE KELLY, Pennsylvania

DENNIS J. KUCINICH, Ohio, Ranking

Minority Member

JIM COOPER, Tennessee

JACKIE SPEIER, California

BRUCE L. BRALEY, Iowa

(III)

C O N T E N T S

Page

Hearing held on May 25, 2011 ............................................................................... 1

Statement of:

Reinhart, Vincent R., resident scholar, American Enterprise Institute

for Public Policy Research; Robert P. Murphy, economist, Institute

for Energy Research; Dean Baker, co-director, Center for Economic

and Policy Research; Greg Wannemacher, president, Wannemacher

Total Logistics; Karen Kerrigan, president and chief executive officer,

Small Business and Entrepreneurship Council ......................................... 15

Baker, Dean ............................................................................................... 35

Kerrigan, Karen ........................................................................................ 49

Murphy, Robert P. ..................................................................................... 22

Reinhart, Vincent R. ................................................................................. 15

Wannemacher, Greg .................................................................................. 43

Letters, statements, etc., submitted for the record by:

Baker, Dean, co-director, Center for Economic and Policy Research, prepared statement of ........................................................................................ 37

Jordan, Hon. Jim, a Representative in Congress from the State of Ohio:

Prepared statement of ............................................................................... 4

Staff report ................................................................................................. 70

Kerrigan, Karen, president and chief executive officer, Small Business

and Entrepreneurship Council, prepared statement of ............................. 51

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio:

Article dated May 24, 2011 ...................................................................... 9

Prepared statement of ............................................................................... 13

Murphy, Robert P., economist, Institute for Energy Research, prepared

statement of ................................................................................................... 24

Reinhart, Vincent R., resident scholar, American Enterprise Institute

for Public Policy Research, prepared statement of .................................... 17

Wannemacher, Greg, president, Wannemacher Total Logistics, prepared

statement of ................................................................................................... 45

(1)

HOW FEDERAL RESERVE POLICIES ADD TO

HARD TIMES AT THE PUMP

WEDNESDAY, MAY 25, 2011

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON REGULATORY AFFAIRS, STIMULUS

OVERSIGHT AND GOVERNMENT SPENDING,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 3:11 p.m., in room

2247, Rayburn House Office Building, Hon. Jim Jordan (chairman

of the subcommittee) presiding.

Present: Representatives Jordan and Kucinich.

Staff present: Ali Ahmad, deputy press secretary; Joseph A.

Brazauskas, counsel; Benjamin Stroud Cole, policy advisor and investigative analyst; Gwen D’Luzansky, assistant clerk; Tyler

Grimm, professional staff member; Peter Haller and Kristina M.

Moore, senior counsels; Christopher Hixon, deputy chief counsel,

oversight; Justin LoFranco, press assistant; Jaron Bourke, minority

director of administration; Claire Coleman, minority counsel; Ashley Etienne, minority director of communications; Jennifer Hoffman, minority press secretary; and Carla Hultberg, minority chief

clerk.

Mr. JORDAN. The subcommittee will come to order.

And let me first apologize to our witnesses. We just can’t control

the schedule, and we had, as you know, a number of votes on the

floor. I particularly want to apologize to Mr. Wannemacher from

the great Fourth District of Ohio for having to wait. Making constituents have to wait, that is even more of a problem.

So we will get organized and start. We will do our quick opening

statements and get right to your testimony. And the schedule is,

now that we are postponed, we may have many Members who are

unable to be with us today. Hopefully some will be able to join us.

But we want to thank you all for being here for this hearing on

such an important topic.

Today’s hearing of the Regulatory Affairs Subcommittee concerns

two issues: how higher prices at the pump are hurting real people

in their day-to-day lives and how a decline in the strength of the

dollar, among many other factors, has had a significant role in adding to the price at the pump.

In Ohio, the unemployment rate is still at 8.4 percent, and the

average gas price hit an all-time high of $4.16 earlier this month.

This has put unbelievable strain on families’ budgets and forced

painful sacrifices.

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For the millions of Americans without jobs, rising gas prices has

compounded their already-tight financial situations. Just this week,

in a story in the Chicago Tribune, they reported that higher gas

prices have restricted the unemployed from looking for work beyond their immediate communities, which has, of course, limited

their options.

The trucking industry, which we have represented here today,

has experienced the full blow of these price spikes. The average national cost of diesel fuel is $3.99 per gallon, and trucking companies are now being forced to implement a surcharge and higher

rates to offset their cost increases.

And while some industries have been hit harder than others, the

effects ripple throughout our economy and are being felt by grocery

stores, pharmacies, and in every other place that Americans spend

their money.

We are familiar with some of the factors driving up the price of

oil, including fear of supply disruptions because of the turmoil in

the Middle East and increased demand from developing nations.

But one major factor often overlooked in the policy discussions is

how the weakening of the dollar has caused the price of oil to rise,

and, I would argue, frankly, the price of many commodities.

Under Chairman Ben Bernanke, the Federal Reserve undertook

an aggressive and unprecedented effort known as quantitative easing, while keeping interest rates at or below zero. Between December 2008 and March 2009, the Fed purchased $1.7 trillion of Treasuries and mortgage-backed securities. The goal of this first round

of quantitative easing was to reduce unemployment and ensure,

‘‘price stability.’’ Yet, the results of QE1 proved lackluster.

Nevertheless, the Fed pursued the old definition of insanity:

doing the same thing over and over but expecting different results.

Late last year, the Fed began purchasing Treasuries at a rate of

about $75 billion a month and a second round of quantitative easing, known in the shorthand as QE2.

Now, at the most basic level, quantitative easing is about printing money. And the most basic result is that the value of the dollar

falls, commodity prices increase, and American consumers are hit

with higher costs of goods and services they purchase.

Unsurprisingly, this is precisely what has occurred. The Joint Economic Committee recently released a study that looked at the

strength of the dollar since quantitative easing began and found

that 57 cents of the current per-gallon price of gasoline is directly

attributable to the dollar’s decline.

Today’s hearing will attempt to lay bear the consequences of

reckless monetary policy and highlight the need for corrective actions to foster a real and sustainable economy recovery.

Since November 2008, the value of the dollar has declined by 14

percent, and it continues to fall. In fact, by the most widely used

index of the dollar strength, the dollar is now at its weakest point

on record.

And while we may grant what the Federal Reserve vice chairman, Donald Kohn, noted earlier last year, that the Central Bank

is in uncharted waters, experience with financial disruptions of the

breadth, persistence, and consequences of the past several years,

there is no denying that the Fed knew full well that such an underVerDate 17-JUN-2003 14:50 Oct 28, 2011 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\70523.TXT KATIE PsN: KATIE
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taking in the realm of monetary policy could have a weakening effect on the dollar, which would mean an increase in the price of

commodities bought and sold internationally.

And, ironically, Chairman Bernanke testified a couple of months

ago before the Senate Banking Committee that he knew that rising

gas prices could negatively affect American consumers and hinder

an economic recovery. He stated, ‘‘Sustained rises in the prices of

oil or other commodities would represent a threat both to economic

growth and to overall price stability.’’

It is the intent of this hearing to broaden the discussion about

the causes and effects of higher gas prices so as to fully understand

action the Federal Government can and should take to aid distressed American consumers and American small-business owners.

With that, I yield to the ranking member for an opening statement.

[The prepared statement of Hon. Jim Jordan follows:]

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Mr. KUCINICH. Mr. Chairman, I want to thank you for holding

this hearing. And when you and I talked, we were both sharing our

concerns about the high price of gasoline that is really quite devastating to families in our respective districts. So I think that this

hearing will help draw much-needed attention to the plight of

American businesses and families as they struggle to deal with the

effects of high oil prices.

And this hearing brings to us witnesses who are esteemed, and

their presence here is quite appreciated. Thank you.

Congress cannot continue to allow American consumers to bear

the brunt of our energy policies, which grant oil companies massive

tax deductions in exchange for the privilege of reaping an unimaginable profit from extraction from the earth. Despite the worst economic crisis since the Great Depression, oil companies are charging

record-high gasoline prices, and they have continued to make the

highest profits of any industry in the world.

Low-income families across this country, including in my own

district in Ohio, are especially harmed by high gas prices because

they have a crippling effect on the price of food. While gas prices

have recently come down a little, they are still too high for many

Ohioans and Americans who have seen their incomes stagnate and

decline. And I am very concerned that the burden gas prices place

on American families and businesses could threaten any economic

recovery.

With gas prices sky-high, this hearing can play an important role

in helping us understand the cause of oil price volatility. As my

friend, Mr. Jordan, notes, we share a, to put it mildly, antipathy

toward the Fed. And, at the same time, I am concerned that, on

this particular case, that we may risk missing the forest for the

trees. Because, in my research, I am still trying to determine what

kind of control the Fed has in terms of key drivers of high oil

prices.

Now, the oil prices have soared recently, in part because of the

rising demand in developing countries such as Brazil, China, and

India. While consumption of oil in the United States may be slowing, global demand is at record levels, causing prices to soar. War,

unrest in the Middle East countries, the oil-producing countries,

has also driven up prices. The Fed doesn’t have any control over

these price-determinative factors. And it doesn’t oversee the derivative market for oil that has really had a lot to do with fueling gas

price spikes.

We know the Commodity Futures Trading Commission does have

something to do with it. And what has been happening is that speculators have been betting on the future price of oil, and they have

contributed to the sharp increases in oil prices. And what they are

doing is they are encouraging oil producers to hoard their commodity in the hopes they will be able to sell it later at a higher

future price. So it is speculation in the commodity futures, in the

oil commodities, that I think is something that is very important

to focus on.

The full committee released a report on Monday finding that excessive speculation could be inflating gas prices by as much as 30

percent. So, I mean, do the math. You know, we are paying over

$4 in some regions. That is what the price has been. Yesterday, the

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CFTC charged five oil speculators with manipulating the price of

crude oil in 2008 and making a $50 million profit from the scheme.

Mr. Chairman, I would like unanimous consent to enter into the

record a New York Times and CNNMoney.com article reporting on

the Commodity Futures Trading Commission enforcement actions.

Mr. JORDAN. Yeah, without objection.

[The information referred to follows:]

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Mr. KUCINICH. Thank you, Mr. Chairman.

And stopping the manipulation of the market for the energy on

which we are painfully dependent will have a significant impact on

lowering gas prices. We have to ensure that the Commodity Futures Trading Commission has the resources and authority to implement the Dodd-Frank reforms passed last year to curb rampant

oil speculation.

Most fundamentally, volatility in oil and gas prices will continue

to threaten American prosperity until we change our Nation’s energy policy. We have to free ourselves from oil dependence, which

has enriched oil companies and left Americans struggling to pay for

gas to go to work. It has also left us with an environment that has

been spoiled. The path to a sustainable energy future demands that

we focus on energy-efficient technologies and renewable energy resources for our energy supply.

I want to thank the chairman and thank the witnesses. I look

forward to your testimony. Thank you.

[The prepared statement of Hon. Dennis J. Kucinich follows:]

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Mr. JORDAN. I thank the ranking member.

Again, let me welcome our witnesses and apologize. With the

change in schedule, we are going to have a lot of Members who are

going to be unable to be here who would otherwise have been here

at the 1 o’clock hour.

We have Mr. Vincent Reinhart, formerly the director of the Division of Monetary Affairs at the Board of Governors of the Federal

Reserve System. He is currently a resident scholar with the American Enterprise Institute.

We have with us Dr. Robert Murphy. He is an economist with

the Institute for Energy Research; Dr. Dean Baker is the co-director of the Center for Economic and Policy Research; Mr. Greg

Wannemacher is president of Wannemacher Total Logistics; and

Ms. Karen Kerrigan is president and CEO of the Small Business

and Entrepreneurship Council.

It is the practice of this committee to swear witnesses in, so if

you would just stand and raise hand and then just answer in the

affirmative.

Do you solemnly swear or affirm that the testimony you are

about to give will be the truth, the whole truth, and nothing but

the truth? If you do, say, ‘‘I do.’’

All right, thank you.

Let the record show everyone answered in the affirmative.

And we will go right down the list, starting with Mr. Reinhart

from AEI.

STATEMENTS OF VINCENT R. REINHART, RESIDENT SCHOLAR,

AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY

RESEARCH; ROBERT P. MURPHY, ECONOMIST, INSTITUTE

FOR ENERGY RESEARCH; DEAN BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC AND POLICY RESEARCH; GREG

WANNEMACHER, PRESIDENT, WANNEMACHER TOTAL LOGISTICS; KAREN KERRIGAN, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, SMALL BUSINESS AND ENTREPRENEURSHIP

COUNCIL

STATEMENT OF VINCENT R. REINHART

Mr. REINHART. Thank you, Chairman Jordan and Ranking Member Kucinich, for the opportunity to discuss monetary policy and

the price of oil.

I believe that this is an appropriate use of the subcommittee’s

time, as both the net rise and the volatility of oil prices over the

past 9 months are partly a predictable byproduct of the Fed’s expansion of its balance sheet in its policy known as quantitative easing.

QE was essentially designed to give a nudge to risk-taking. Fed

officials announced they would purchase riskless Treasury securities on the hope that investors would reinvest the proceeds in

riskier assets, such as corporate equities and bonds. But not all the

effects of QE has played out in financial markets. Since the Fed

firmly signaled in August its intent to launch the latest round of

QE, oil prices have risen from $76 a barrel to around $100 per barrel.

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Why does the Fed matter for oil prices? The producers of oil, as

well as other commodities, typically sell their output in a worldwide market priced in U.S. dollars. Thus, they care about the current and expected future purchasing power of the dollar and how

that will translate into goods and services back home. But QE has

been associated with higher inflation and dollar depreciation,

which combines to erode the purchasing power of the foreign producers of commodities. Thus, some of the rise in the nominal price

of oil has been to catch up with that erosion.

More important in shaping near-term oil price dynamics has

been the nudge to investors from QE to move from safe to riskier

investments. The commodity market has been one outlet for that

reinvigorated search for yield. This has been reinforced by the

Fed’s policy of keeping short-term nominal interest rates near zero,

which keeps it cheap to trade on borrowed funds. Such speculation

can fuel spasms of enthusiasm or angst that trigger wide swings

in prices, although, on net and over the longer term, speculators

neither consume nor produce oil.

This increase in the price of oil and its heightened volatility

poses three distinct problems for the Fed and for the macro economy:

First, a rise in energy costs of one-third takes a distinct bite out

of Americans’ budgets, working to restrain spending in an economy

already burdened by lingering balance-sheet problems from the financial crisis. As of yet, the oil price shock is not as large as those

associated with severe macroeconomic dislocations of the past halfcentury, though.

Second, increases in the price of oil, as well as those of other

commodities, have fueled an upsurge in inflation and a depreciation of the dollar on foreign exchange markets. Fed officials continue to believe that people are not likely to expect the prices of

other goods and services to rise commensurately. If so, and if commodity prices do not continue to rise, then the level upshift in oil

prices will ultimately pass out of inflation calculations.

Third, in recent months, the world seems to be a much less safe

place. This makes the near-term balance between oil demand and

supply volatile. This could, to the Fed’s regret, also make global investors more skittish and undercut some of the benefits in financial

markets attributable to QE.

On net, it is likely that the economy-wide effects of the energy

shock are unpleasant but not derailing to economic expansion. But

this is a gamble, and one that Fed officials must apparently have

accepted when they decided to launch QE. We will live with the

consequences of that judgment in coming quarters.

[The prepared statement of Mr. Reinhart follows:]

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Mr. JORDAN. Thank you, Mr. Reinhart.

Dr. Murphy.

STATEMENT OF ROBERT P. MURPHY

Mr. MURPHY. Well, thank you for having me, and thank you for

having this hearing. I think it is very important that the public realizes the possible role the Federal Reserve has been playing in

high oil prices.

Unfortunately, a lot of my prepared remarks are going to overlap

with what Mr. Reinhart said, so I wish I had gone first, and then

he would be copying me. But I will go ahead, and maybe I will say

his same points in somewhat different language.

So, of course, what everyone knows is that the Federal Reserve has expanded its balance sheet since the crisis set in by about $1.6

trillion, in terms of what is called the monetary base. So that is

how much physical currency is in circulation, plus banks’ checking

account deposits with the Fed, as it were. So, to put that number

in perspective, from the time the Fed was founded in late 1913 up

until the fall of 2008, they hadn’t put that much in. So the Fed has

added more in the last 21⁄2 years than the entire history of the Fed

up until that point.

Mr. JORDAN. And that number was $1.6 trillion you said?

Mr. MURPHY. Right. About $1.6 trillion, yeah, is how much they

have added since September 2008 to the monetary base. And up

until that point, it was $932 billion, from 1913 to then.

So when we say it was an unprecedented intervention, I mean,

that is not hyperbole; it really is. And, of course, we know, at the

same time period, the price of oil, depending on when you start and

stop it, has almost tripled. So the question is, do the two have anything to do with each other or is it coincidence?

So, in my written testimony, I gave the two main mechanisms

by which Fed policy could be driving the increase in oil prices.

The first one is what the Joint Economic Committee focused on

in their recent report, and what they looked at was just the fall in

the dollar against other currencies. Because, as Mr. Reinhart said,

oil is an international fungible commodity, so oil prices basically

have to be the same for everybody once you adjust for currency exchange rates.

And so, if the dollars fall against other currencies, that means

the oil price quoted in U.S. dollars is going to go up, everything

else equal. So, in other words, Americans have seen oil prices go

up more than the Japanese, for example.

Mr. JORDAN. Right.

Mr. MURPHY. All right. So if you look at—the JEC report looked

at from, I guess, when QE1 was announced in November 2008 up

until whenever this report came out, and they said the dollar fell

about 14 percent, looking at the index they used. And so, on those

calculations, that is how they are coming up with the figure that,

if the dollar had stayed as strong as it was when QE1 was announced up until today, then right now gas prices at the pump

would be about 57 cents lower. OK?

So that is the logic they are using to come up with that estimate,

is they are saying the dollar has fallen since the announcement of

QE1 and then QE2. And, hence, if the dollar stayed the same, then

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gas would be 57 cents cheaper at the pump right now. That is what

their argument is.

But there is a whole other possible mechanism that they didn’t

address, and that is, is it possible that the broad rise in commodities in general, regardless of the currency that you are using, could

that also be influenced by Fed policy? And I would argue that it

is, but it is hard to come up with a quantitative amount.

Just for qualitative arguments, commodities in general have gone

up, so it is not just that oil went up. It is commodities across the

board. And even, like, for example, gold and silver, since the crisis

and fall of 2008 until now, gold has gone up about 80 percent and

silver something like 210 percent. All right?

So I don’t think that—I think it is very plausible to say at least

some of that is due to people are afraid of the dollar being debased,

and so they are rushing into the precious metals, you know, as an

inflation hedge. It is not just that people in China are giving more

jewelry as presents and that is why gold and silver are up so much.

All right?

So if you buy the logic there when it comes to gold and silver,

it is not a stretch to say, well, maybe some investors—you know,

there is lots of liquidity floating around. What are they going to do

with their money? They are not going to put it in real estate, obviously. Maybe they don’t want to put it in the stock market because

the economy is bad. Maybe they are going to go into commodities,

thinking, you know, surely wheat and oil are always going to have

a demand, and so that is a way to protect my wealth in case there

is future inflation.

So that is the other possible mechanism by which Fed policy

could be worked. So, you know, given whatever the world price of

oil is if the dollar falls, that is one thing. But the other mechanism

is maybe commodities, as part of that huge upswing, is people are

trying to hedge themselves against inflation. So those would be the

two——

Mr. JORDAN. And if I could interrupt you for a second. Would you

say, so that is not—that is maybe just good, smart, practical investing versus any type of speculator driving the price up?

Mr. MURPHY. Well, yeah. I mean, it depends on your perspective.

To me, that is like saying, you know, it is cold out because the

thermometer is showing a low reading. I mean, if people think that

something bad is going to happen, then they react. And that is the

whole point, or one of the points, of having futures markets in the

first place, is to anticipate future movements.

Mr. JORDAN. Right. We will give you 30 more seconds if you

want, since I took some of your time.

Mr. MURPHY. That is fine.

[The prepared statement of Mr. Murphy follows:]

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Mr. JORDAN. All right. Thanks, Doctor.

Dr. Baker.

STATEMENT OF DEAN BAKER

Mr. BAKER. Thank you, Chairman Jordan and Ranking Member

Kucinich. I appreciate the chance to talk on this set of issues.

I want to make three main points. First, what I am going to say

is that the Fed’s policies at most contribute a very small amount

to the increase in the price of gas. Second, I am going to say that

a decline in the dollar is both desirable and necessary. And then,

very briefly, I will just say that most of the rise in the price of oil

has been attributable to other factors, and the three obvious ones

I think have all been mentioned here: one, the growth in the developing world; two, the instability in the Middle East; and the third,

that there is certainly speculation in the oil market, which I would

argue has had some effect on prices.

OK, the first point, the quantitative easing policy, I find it hard

to quarrel—I have been a critic of the Fed quite often, and often

quite harsh—but I find it hard to quarrel with their policy here.

We have had the worst downturn the country has seen since the

Great Depression. It was a situation that called for a very aggressive response. And the Fed gave, to my mind, a relatively timid

one, with its policy of quantitative easing, given the current circumstances.

So the intention, of course, was, by buying large amounts of

mortgage-backed securities and government bonds, that they would

not just lower the short-term rate, which they had already pushed

down to zero, but lower the long-term rate. And this would have

three beneficial effects. On the one hand, it would give some boost

to investment. Second, it would make it easier for people to refinance mortgages. We have 30-year mortgages at the lowest rate

they have been in more than half a century. And, third, that it

would actually lower the value of the dollar. That was quite deliberately one of the intentions, the idea being that would encourage

net exports.

It did, I would say, have somewhat of that effect, but I think the

impact has actually been very limited. I think there is a real distortion in this discussion in the sense that there was a big run-up in

the dollar in the fall of 2008. So if you go back and look at the history, the dollar rose by around 14 percent between the summer of

2008 and the fall, which was a direct response to the financial crisis. There was a flight to safety. People have always gone to the

dollar when there has been a flight to safety. That has led to a

large increase in the value of the dollar.

You could perhaps blame QE1 and QE2 for helping to stabilize

world financial markets and, that way, getting over that fear, but

we should have expected that run-up in the dollar would be reversed once we saw the economy stabilize to some extent.

As it stands now, the dollar is just a little bit below where it was,

I think about 2 percentage points below where it was before the

run-up.

And I should point out—I can come back to this—I think there

is a misunderstanding about the broad index, which is what I assume you referenced in saying that it is at the lowest level ever.

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I think that, when you look at a measurement issue in there, it is

really not. I can come back to that.

But the other point I wanted to make in that respect is that the

dollar had been falling. This is not something that just happened.

So the dollar had been falling from 2002 until the financial crisis

in 2008. And if we just envision we had continued on that downward trend, the current value of the dollar is still about 16 percent

higher than what it would have been on that trend. So there is

nothing new in this story.

The second point, we need a lower-valued dollar. In a system of

floating exchange rates, the dollar fluctuates to equalibrate trade.

We have a very large trade deficit, currently about $600 billion.

The only mechanism I can think of to get that down is a lower-valued dollar.

As I said before, I take that was one of the main motivations of

the quantitative easing policy because that is how you boost our

net exports. You make our exports cheaper for people living in

other countries. You make imports more expensive for people living

in the United States. That is unpleasant, but there is no way

around it.

In the context of the price of oil, the way I would see it is that

if we deliberately try to have an artificially high dollar, we run a

high dollar policy even though it is leading to very large trade deficits, in effect what that means is we are borrowing money from foreigners to subsidize our consumption of imports. In this case, we

are talking about the price of oil. We would all like cheaper gasoline. I would like to pay less at the pump, too. But I am not really

sure it is a good policy to tell our kids that we are going to be borrowing huge amounts of money from abroad so that we could have

cheaper gas today. That is what a high dollar policy means.

The last point I was going to say is that, you know, it is easy

to find the culprits, if we want to call them that, in terms of what

is pushing up the price of oil. We have countries like China, which

is now the second-largest consumer of oil, growing 10 percent a

year; India coming up fast as well, also growing 10 percent a year.

That is leading to rapid increases in demand for oil. There is no

corresponding increase in the supply.

Uncertainty—we all know about the situation in the Middle

East. And we could certainly fairly easily tie the most recent runup in the price of oil—it went from roughly $80 a barrel to over

$100 a barrel when the civil war in Libya broke out in earnest.

The last point, speculation. We know there is speculation in the

market. Ranking Member Kucinich referred to the article in the

New York Times today about SEC action against speculators that

pushed the price of oil to $150 a barrel before the downturn. Clearly, there is some speculation again today.

So, just to conclude, I would say that, you know, if we take a look

at the Fed’s actions, I’d say for the most part they have been, you

know, largely on the right track. And insofar as they contribute to

the higher price of oil, I really don’t think there is anything we can

or should think to do about that.

Thank you.

[The prepared statement of Mr. Baker follows:]

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Mr. JORDAN. Thank you, Dr. Baker.

Mr. Wannemacher.

STATEMENT OF GREG WANNEMACHER

Mr. WANNEMACHER. Chairman Jordan, Ranking Member

Kucinich, I really appreciate this opportunity to testify today regarding the impact of higher oil prices on the trucking industry.

Oil prices have a dramatic effect on our business. Part of our

business is a trucking operation. We operate 38 trucks; 33 trucks

operate in the mid-Atlantic and Midwestern States, and 5 other

trucks operate locally, shuttling loads to our various distribution

centers and to our customers’ plants, picking up customers’ loads,

and making local pickups and deliveries.

The cost of fuel has risen to be our single largest expense item.

When I took over our company in 1991, fuel expenses were only 6

to 7 percent of revenue. During the last 4 years, our fuel expenses

were the following as a percent of revenue: 32 percent in 2007; 41

in 2008; 29 in 2009, 31 in 2010. Now, in the first quarter of 2011,

that expense was 36 percent of revenue.

Over the years, we have tried various techniques to better control our exposure to the fluctuation in fuel costs. We have had our

own fuel tanks until the EPA regulations made it uneconomical for

a fleet our size. We tried hedging a portion of our anticipated purchases to lock in the pricing. We contract with fuel service providers to buy at a fixed rate over their cost or off the listed pump

price. We have set our trucks’ top speed at 65 miles per hour, installed onboard auxiliary power units to eliminate idling, gone to

wide base tires with a system to keep the tires properly inflated

at all times. And, of course, we have contracts with our customers

that include fuel surcharges to help offset the fluctuation of fuel

costs.

For a fleet our size, hedging in contract fuel purchases are extremely challenging and very time-consuming. Small operations

find themselves at a disadvantage, trying to find the time necessary to stay informed and educated on the constantly changing

pricing structures and formulas the vendors try to institute.

Fuel surcharges are the least cumbersome for us to manage. The

biggest challenge with this is that customers want you to lock your

rates in for a minimum of 1 year. Depending on how their business

is doing and whether they will take the time to renegotiate annually can also be an impediment. Because of our small size, in some

instances we do not provide enough impact on their capacity to get

their attention.

The fuel prices we are encountering today are having a huge impact. The best way to explain this is to illustrate how much profit

we lose with fuel prices at the current levels. Let me explain how

fuel surcharges are implemented.

Fuel surcharges only apply to loaded miles. Our fleets run about

15 percent empty miles. Our average truck runs 2,700 miles per

week. The fleet average is 6.6 miles per gallon. Fifteen percent of

the miles are equal to 405 miles per truck per week which we see

no reimbursement for the increased cost of fuel.

The impact from the average cost at $2.50 per gallon for fuel,

last seen in the fall of 2009, to the recent average of $4 per gallon

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is $1.50 per gallon on the 62 gallons it takes to run the 405 miles.

Roughly speaking, that is $92 in lost money per truck per week.

Remember, I told you we run 38 trucks, so, therefore, that is almost $3,500 per week. At the current rate, it will be a loss of

$180,000 for the year for our fleet.

Now, if it weren’t for the higher fuel prices, we would recognize

four potential areas for those extra funds: First, we could invest in

more trucks; second, we would look to increase technology; third,

to increase our drivers’ pay; and, finally, to reduce the debt on our

equipment.

Since 2008, many fleets have reduced the size of their operations,

and significant amounts of others have simply gone out of business.

Now we are starting to see a shortage of trucks. With the capacity

shortage, we would utilize the extra money to increase the size of

our truck fleet. This would create more jobs at our company. We

could immediately grow our fleet 10 percent if the fuel prices were

back down to $2.50 a gallon.

A primary objective of our company is to look at and invest in

new technologies and innovations that can help improve our fuel

mileage. We do a cost-benefit analysis on any proposed improvements to justify any expenditure. It is imperative that the payback

period is shorter than the useful life of the equipment and will not

hinder the resale value at trade-in time.

During the downturn in the economy, most trucks, including ourselves, found it necessary to reduce drivers’ wages to remain competitive. If fuel costs could get back in line, I believe you would see

an increase in drivers’ wages across the board.

Our final option would be to reduce the amount of debt we still

have on our equipment. Solidifying the net worth of our company

will enable us to secure better financing terms in the future. And

it is certainly no secret that bankers today are taking a closer look

at companies’ debt-to-net-worth ratio.

During the fuel spikes in 2008, we elected to gradually reduce

our fleet down from 64 trucks to the current level of 38 trucks. If

pricing continues to vacillate, we will definitely reduce more to prevent losses. We certainly don’t like to be put in this position, but

we can’t continue to put the remainder of our company at risk.

Since it is our largest expense item, stabilization in the cost of fuel

is extremely necessary and vitally important to provide the ability

for trucking operations like ourselves across the country to remain

in business.

We have absorbed the cost increases due to regulations of EPA

on our truck engines and fuel-storage facilities, as well as the escalation of other government regulations and enlarged payroll taxes

caused by high unemployment in all sectors of the work force. We

cannot continue on this wild ride created by speculators and some

in our government holding back on drilling opportunities that

would reduce our dependency on foreign oil. Not just trucking companies, but the American people need stabilization in fuel prices.

Thank you for this opportunity to testify, Chairman Jordan.

[The prepared statement of Mr. Wannemacher follows:]

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Mr. JORDAN. Thank you, Mr. Wannemacher. We appreciate getting the small-business owner’s perspective.

Ms. Kerrigan.

STATEMENT OF KAREN KERRIGAN

Ms. KERRIGAN. Well, thank you. Good afternoon, Chairman Jordan and Ranking Member Kucinich. Thank you for hosting today’s

hearing and for inviting the views and concerns of small-business

owners to be considered on this important issue.

I have been asked to provide a general snapshot, if you will, regarding the impact of high gas prices on small-business owners and

entrepreneurs. Needless to say, the high costs are making it very

difficult for small businesses to compete, to grow, and even survive

in what remains a very, very difficult economic environment.

For many small-business owners, sales and revenues remain

weak while business costs continue to move higher. Business owners, for example, are very, very concerned and continue to stay burdened with high health insurance costs, with employee benefit

costs. At the same time, raw material costs continue to go higher.

Supplies, shipping, etc., all these costs continue to go higher. And

with weak revenues, this is squeezing small-business owners.

So, obviously, costs are a major issue for small-business owners,

how to control them, how to contain them, how to deal with them

and remain competitive in a very, very competitive global economy.

Tight cash-flows, combined with slim profit margins, limit the flexibility that many small-business owners have in responding to higher costs, particularly unexpected ones.

So, unquestionably, small-business owners are feeling the pinch

of higher gas prices. The regular feedback that we receive from our

members, as well as small-business owners across the country,

point to significant effects that we believe are undermining the economic recovery.

This feedback has been backed up by our latest ‘‘Entrepreneurs

and the Economy’’ survey that we released this week, which finds

that the specific ways that business owners are dealing with higher

gas prices could have profound consequences for our economy, and

particularly if prices remain high. Seventy-four percent of business

owners, according to that survey, report that higher gas prices are

having an impact on their business. Forty-seven percent report

that higher gas prices are affecting their plans to hire new employees. Forty-one percent have raised prices due to higher gas prices.

Twenty-six percent have had to cut employees or their hours

worked. And, staggeringly, 38 percent believe if gas prices remain

high or increase further, their business will not survive.

Obviously, how business owners respond to higher gas prices not

only impacts their own competitiveness and capacity to grow, but

also impacts the overall health of the U.S. economy. If small-business owners are not hiring, if they are cutting hours or if they are

cutting jobs, our entire economy suffers. Likewise, if small-business

owners are putting fewer resources into investments and innovative projects, the vibrancy of the economy suffers along with the

overall national competitiveness.

So high gas prices are hitting the two major pain points of smallbusiness owners. Obviously, higher gas prices are raising business

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costs, which is forcing many business owners to do things like raising prices that put them at a competitive disadvantage. Second,

high gas prices are hurting sales, as customers have fewer disposable dollars to purchase the goods and services provided by smallbusiness owners. And as I noted in my written testimony, a survey,

DollarDays.com survey, found that 64 percent of business owners

report lower sales due to higher gas prices.

Especially as our Nation is working to emerge from the recession,

it is more important than ever that small businesses operate in a

more predictable environment. I think they continue to tell us that

uncertainty pretty much rules their everyday operations. Without

certainty, without predictability, small-business growth will be

stunted and these firms simply will not be able to create the largescale number of jobs that are desperately needed by our economy.

Thank you again for hosting this hearing, and I look forward to

your questions.

[The prepared statement of Ms. Kerrigan follows:]

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Mr. JORDAN. Thank you, Ms. Kerrigan and all our witnesses.

Mr. Wannemacher, you mentioned fuel costs went from 6 percent, I think you said, 6 or 7 percent, to now somewhere in the last

3 years a range of 30 to 40 percent. Is that accurate?

Mr. WANNEMACHER. Yes, sir.

Mr. JORDAN. Yeah, I mean, that is huge. And, obviously, it has

had an impact on your industry and, I assume, every other trucking industry out there. But have you noticed your customers, that

it is impacting them? If we listen to Ms. Kerrigan’s testimony, obviously it is. But have you seen that in a firsthand way with your

customers that you deal with?

Mr. WANNEMACHER. Yes. The biggest impact is, you get the small

companies that aren’t—you know, the larger companies are familiar with fuel surcharges and are willing to absorb that. But it is

the smaller companies that don’t ship as many truckloads in a

week that it really is alarming to them. And they try to absorb

those things rather than try to pass them on to their customers.

Mr. JORDAN. Right. Right, right.

And you have seen that, as well, Ms. Kerrigan? Relative to the

surcharge issue, have you had any specific examples with your

folks on the surcharge issue?

Ms. KERRIGAN. On being impacted by surcharges?

Mr. JORDAN. Yeah.

Ms. KERRIGAN. Shipping I think is a huge one, you know, where,

you know, anything that they are receiving—florists. I think the

florist industry, in particular, are receiving a fair amount of surcharges on shipping.

Mr. JORDAN. Uh-huh. The other thing you mentioned in your testimony, Ms. Kerrigan, was the other regulatory concerns, other regulations that are a concern to business owners. One of the focuses

of this subcommittee is, you know, regulation and how that impacts

business.

Talk to me about some of the things—in addition to the gas price

issue, we have other things that government is doing. Talk to me

about some of the specific things that you think are negatively

hurting job growth and economic growth right now.

Ms. KERRIGAN. Well, gosh, where do you start?

Mr. JORDAN. You or Mr. Wannemacher, either one.

Ms. KERRIGAN. Well, one big one, I think, is the health-care issue

and, you know, the concerns about what the health-care reform

bill, as it gets implemented, what it means for their health insurance costs. Because they don’t see them going down; they continue

to see them going up. You know, what the employer mandate is

going to mean for their business, what the fines are going to mean.

Mr. JORDAN. Right. And it is this cumulative effect that concerns

me and I think concerns many Members of Congress and obviously

concerns—so it is not just—well, you can point to one, but it is one

on top of the other. Now you throw in the gas price issue.

Ms. KERRIGAN. It is one on top of the other. I mean, there is the

tax issue and uncertainty——

Mr. JORDAN. Right.

Ms. KERRIGAN [continuing]. Of what their taxes are going to be.

I mean, there is the implementation of Dodd-Frank. What is it

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going to be in terms of their cost availability of capital and loans?

It is all that.

It is very difficult to get traction. And a business owners needs

momentum, they need traction in order to grow and have the

confidence——

Mr. JORDAN. Right.

Ms. KERRIGAN [continuing]. To do the things that they need in

order to invest and to create jobs.

Mr. JORDAN. Mr. Wannemacher, can you comment on the cumulative effect that concerns so many of us?

Mr. WANNEMACHER. You know, it is. It is just a compounding.

When you have the EPA issues—for example, when the EPA

changed the regulation on the truck engines, we ended up paying

about—the first round, it was about $6,500 for just the EPA regulations. The second round was an additional $8,000. And so it is

just a compounding thing of those type of things.

When we went to low-sulfur fuel, which gave us lower fuel mileage, higher-cost trucks, lower fuel mileage, and, you know, we can

only pass on the fuel surcharge based on the price of fuel. So that

was also a loss.

And then what Ms. Kerrigan said, also, about the health care. I

mean, that just creates such an instability in your mindset as far

as going forward, those added-on costs of government regulations

that really have no—really don’t belong there, in a lot of instances.

Mr. JORDAN. Uh-huh. Great.

Let me turn to our other guests, and we will do a second round

here.

I am just curious—and let me start with maybe Mr. Reinhart—

in the last couple years—and I genuinely don’t know the answer

to this one—has the Fed been the largest purchaser of Treasuries?

Are they the single largest purchaser and/or holder of Treasuries

in the last, say, 2 years?

Mr. REINHART. No, actually. Here is a good comparison——

Mr. JORDAN. That surprises me. Because I think it is, like, $75

billion——

Mr. REINHART. So when the Fed——

Mr. JORDAN. So who is their largest holder? Is it——

Mr. REINHART [continuing]. Put QE2 on the table in August, since then it has expanded its balance sheet by $500 billion of

extra Treasury securities.

Mr. JORDAN. OK.

Mr. REINHART. Over that same period, foreign official entities

have increased their holdings of government securities held in custody at the New York Fed by $1 trillion.

Mr. JORDAN. OK.

Mr. REINHART. So, in some sense, as Dr. Baker noted, the net depreciation of the dollar has been pretty modest, so you can’t say it

contributes a lot to the rise in oil prices. But that actually masks

two effects. The Fed has been buying Treasury securities with $500

billion of extra dollars, which would tend to move the dollar lower.

Mr. JORDAN. Sure.

Mr. REINHART. But, at the same time, foreign official entities

have been buying a trillion dollars of Treasury securities with their

own currencies, tending to offset what the Fed is doing.

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Mr. JORDAN. OK, but you said foreign. So, total foreign holdings

of Treasuries is bigger than the Fed——

Mr. REINHART. Oh, most certainly.

Mr. JORDAN [continuing]. Single biggest holder? Are they bigger

than—so the single biggest entity holding Treasuries today, in the

last few years, would be the Fed?

Mr. REINHART. The single biggest entity in terms of the stock

holdings of government securities right now would be foreign official entities.

Mr. JORDAN. Combined?

Mr. REINHART. Yes. That is, the reserve managers, China, India,

Russia, Brazil, and the like.

Mr. JORDAN. OK. Got it. And then would the Fed be second?

Mr. REINHART. The Fed would be second.

Mr. JORDAN. Ahead of other funds and individuals and etc.?

Mr. REINHART. Yes.

Mr. JORDAN. OK. OK.

I will get back to that, but I want to get to our ranking member,

and then we will do another round.

The gentleman from Cleveland is recognized.

Mr. KUCINICH. Let me ask Mr. Reinhart just a quick followup.

I was distracted for a second. I want to make sure I got your answer.

Of the trillion dollars that is being purchased, did you say who

is buying those from abroad? China, you said?

Mr. REINHART. So, all we know is that the Federal Reserve Bank

of New York holds Treasuries—government securities in custody

for foreign official accounts.

Mr. KUCINICH. Right. But——

Mr. REINHART. That went up a trillion dollars.

Mr. KUCINICH. OK. Got it.

Mr. REINHART. We don’t know the composition of it.

Mr. KUCINICH. OK.

Dr. Baker, in a March 2, 2011, Congressional Research Service

report entitled, ‘‘The U.S. Trade Deficit, the Dollar, and the Price

of Oil,’’ which I am going to ask unanimous consent be entered into

the record——

Mr. JORDAN. Without objection.

Mr. KUCINICH. Thank you, Mr. Chairman.

In this, CRS agrees with your assessment that the Fed’s monetary policy actions have not been the main driver of higher oil and

gas prices.

Now, can a case, however, be made here that there is a tangential effect that the Fed has on these prices? I mean, some of our

witnesses have made that. Would you comment on their analysis?

Mr. BAKER. Well, again, I would say—and the CRS report, of

course, agrees that there was some impact in lowering the dollar.

But, again, I think that was relatively modest, you know, and I

think most of the evidence suggests that.

The other issue is, I had said and the other witnesses I think

suggested this, maybe put in a different way, but that the low-interest-rate environment does create a situation in which you are

likely to see some speculative run-up in the price of oil and other

commodities. And I think that has certainly been true. That was

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certainly true in the period in 2007–08, when oil hit $150 a barrel.

And it would be surprising to me that there is not some speculation

there today. It just stands to reason that when there are sharp

movements, almost invariably at least some of that is driven by

speculation.

Mr. KUCINICH. OK. Is speculation driven by being able to trade

with borrowed money?

Mr. BAKER. Of course. You know, speculators tend to—the way

you make money as a speculator is you become heavily leveraged.

And if you could do so cheaply, then it makes it easier to speculate.

Mr. KUCINICH. Let me ask you—well, first of all, just to preface,

we can debate the causes of high oil and gas prices, but I think

that, you know, just in my own opinion, we have to keep in mind

that the U.S. ranks second in the world in fossil fuel consumption.

And energy-producing companies have used our dependence on oil

to enrich themselves and pollute the air and the land.

It is clear to me what we are seeing is the result of a monopoly.

And by that, I mean, when it comes to individual transportation,

there is only one source—major source of fuel, and that is oil.

Americans depend on it every day to get to work, get their kids to

school, get groceries, conduct their daily lives. Businesses are dependent on it, as has been pointed out. So the demand for oil is

fairly inelastic.

When demand is inelastic, if there is a monopoly in supply, conditions are ripe for the kind of price manipulation that was documented in the minority report issued on Monday. And that led the

Commodity Futures Trading Commission to charge five oil speculators with illegal price manipulation yesterday.

Dr. Baker, can you talk a little bit about the effects of monopoly

of oil on our economy and about the possibility that breaking that

monopoly with alternative energy sources, what that would mean

for our economy?

Mr. BAKER. Sure. I just realized, earlier I had made a reference

to the Securities and Exchange Commission. In fact, it was the

Commodity Futures Trading Commission that brought those

charges. So, just to correct my earlier statement.

Mr. KUCINICH. Thank you.

Mr. BAKER. Yeah, I see it as a situation as, in effect, we are subsidizing oil consumption, part of that story being an overvalued dollar. So, in a situation where we are running a very large trade deficit, in effect what we are doing is borrowing money to get oil and

other imports cheaper than would otherwise be the case if we had

a dollar that was consistent with more balanced trade.

And, obviously, when you have a situation where there is a number of relatively small number of oil companies, they are in a position to take advantage of shortages, temporary shortages. It makes

it a more volatile environment because, as you say quite correctly,

at least in the short term, demand is very inelastic. When you have

a relatively small number of suppliers, supply can be very inelastic

as well.

Mr. KUCINICH. Let me ask you something. I have about a halfminute. How would you explain to my constituents simply—I

mean, we are talking about some, you know, fairly high-level extractions there, in terms of money supply, the role of the Fed. How

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would you explain this, in layman’s terms, to the average motorist

who is paying $4 to $5 a gallon about why is this happening? Put

it in layman’s terms.

Mr. BAKER. Well, I guess I would say there are two parts to that

story. One is, you know, certainly the short-term story, where I

think the price has gone up more than would be justified by the

fundamentals due to the fact that you have speculators that are

pushing up the price. So you have speculators who are thinking

prices will be higher in the future or at least for a short period of

time. They are hoping to get in——

Mr. KUCINICH. So speculators are driving up the price. That is

one factor.

Mr. BAKER. That is one factor.

Mr. KUCINICH. OK. And the other factor?

Mr. BAKER. The other is simply the long-term story, that oil is

a commodity in relatively limited supply. Demand is increasing

very rapidly in the developing world, and it is almost certainly

going to outstrip the rate of growth of supply. And the only way

you can reconcile more demand and relatively limited increase in

supply is with a much higher price.

Mr. KUCINICH. So, even without speculation—thank you, Mr.

Chairman—even without speculation, based on the supply demands that you are talking about, you are saying that the price of

oil—if nothing else changes in terms of alternative sources, the

price of oil is going to go up. Is that what you are saying?

Mr. BAKER. Exactly. I don’t see any story where, if we look out

5 years from now and let’s say there are no speculators, you know,

we are just looking at what the world economy looks like, possible

projections of growth, I don’t see any story in which the price of

oil is not considerably higher than it is today.

Mr. KUCINICH. OK.

Mr. Chairman, thank you for your indulgence on that.

Mr. JORDAN. No problem.

Mr. Baker, you said earlier about subsidizing oil consumption.

What was the statement you made earlier, that we were—when we

were doing that and what——

Mr. BAKER. That, in effect, by having a large trade deficit, which

is associated with an overvalued dollar, we are subsidizing our consumption of oil and all imports and paying for that with money

that we have borrowed from foreigners. That corresponds to a trade

deficit.

Mr. JORDAN. Which, I think, raises the question. So do you think

rising fuel costs are a good thing?

Mr. BAKER. I think that they are an inevitable thing. That is

part of the——

Mr. JORDAN. I didn’t ask you that. Do you think they are a good

thing, do you think they are a positive thing?

Mr. BAKER. I think there are positive—I mean, I am not trying

to be evasive—there are positive aspects to it. I mean, it will——

Mr. JORDAN. In light of what we just heard from a small-business owner?

Mr. BAKER. There are negative aspects as well, of course. None

of us want to pay more for gas. Businesses are going to be very

harmed. Some businesses will go out of business.

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On the other hand, exporters are going to do very well because

the dollar will fall. So we are going to get a lot of jobs created in

export industries. Also, in import competing industries, because imports are now more expensive, there are going to be more jobs

there.

Mr. JORDAN. Let me get back to Dr. Murphy.

You made a point earlier. You said, I believe, added to the mone- tary base $1.6 trillion since September 2008 to today; from 1913 to

2008, $932 billion. So, in 3 short years, or less than 3 years, more

than we did in—I didn’t do the math, but what is that? Almost 80-

some years, or 90—80-some years.

And Mr. Baker, I think, called that ‘‘timid’’ in his opening statement, that the Federal Reserve’s approach to this was timid. I assume you disagree with that.

Mr. MURPHY. Right, I disagree strongly. And, I mean, it probably

is the difference in our perspective as to what the appropriate policy response is. I believe that the problem was that Chairman Alan

Greenspan had interest rates too low after the dot-com crash, and

that fueled the housing bubble——

Mr. JORDAN. Uh-huh.

Mr. MURPHY [continuing]. And so that was the wrong thing to do.

That caused mal-investments. And so, to me, what Chairman

Bernanke has done is just doubled down on the wrong policies that

Chairman Greenspan put into place.

Mr. JORDAN. Yeah.

Mr. MURPHY. But I think Dr. Baker is coming from a different

perspective, obviously. And so, right, so they would say it is timid

because, look, it didn’t work fully, so we need to put more medicine

in; whereas I am saying, no, that is poison, just pumping in extra

money that you are creating out of thin air——

Mr. JORDAN. Yeah.

Mr. MURPHY [continuing]. To use a colloquialism.

Mr. JORDAN. Do me this. Maybe you and Mr. Reinhart then second. Rank order—I mean, look, because we got supply and demand

concerns, we got turmoil in the Middle East, we got those who say

speculators, and then we got the Fed and quantitative easing and

devaluing of the dollar.

So, rank order—and let’s just, as a starter, say all have some influence on the price of fuel and, ultimately, the price of gasoline.

But rank order them, which one has the biggest, which is second,

which is third, and which is fourth.

And I would also—well, I will get to that article in a second. But

do that first, and then we will go to Mr. Reinhart.

Mr. MURPHY. Sure. I mean, I think we should just be humble

and say nobody knows for sure. We would have to turn back time

and do the alternate universe to see what actually happens. So this

is all speculative, no pun intended.

I personally think that the Fed has not fixed the problem. OK?

So it is true, as Dr. Baker was saying, you could argue, well, no,

the Fed averted a catastrophe, and so, therefore, even though—we

are, in a sense, both agreeing the Fed caused oil prices to go up.

And he is saying that is, you know, arguably a good thing in one

perspective. But I don’t think we are out of the woods yet. I think,

you know, years from now we are still going to look back and say,

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when is the economy going to get better? So, in that sense, I think

the Fed is—I personally would say it is the Fed.

Now, in terms of speculators, again, that is sort of a loaded term,

but, I mean, if people are worried that the dollar is going to depreciate strongly——

Mr. JORDAN. Right, my first question to you.

Mr. MURPHY. Yeah. That is partly what they are supposed to do.

Mr. JORDAN. Normal behavior, yes.

Mr. MURPHY. A futures market is supposed to allow that.

Mr. JORDAN. But you would say the Fed’s actions are the number-one reason that the price of gasoline for families and business

owners went up, more so than turmoil in the Middle East, more so

than rising demand from countries and rising demand, period, you

know, more so than supply and demand concerns?

Mr. MURPHY. From the fall of 2008 until now, yes. I think, if you

are saying—like, the last 6 months, the Middle East, I think, is a

far bigger influence of what is going on.

Mr. JORDAN. But over the last 3 years.

Mr. MURPHY. Right, if I had to pick one.

Mr. JORDAN. Mr. Reinhart, could you comment, the rank order

in question?

Mr. REINHART. So, one thing I do want to make clear is the distinction between the relative price of oil and the nominal price of

oil and, similarly, the real exchange rate and the nominal exchange

rate.

We need real exchange rate depreciation to adjust the trade accounts. Maybe we should think about a way of getting that without

as much domestic inflation. Global supply and demand is such that

the real price of oil is going to be going up over time, but Fed policy

will determine how much of that real price increase turns into

nominal price increases.

And I think, over the longer history of the Fed—that is, over the

last couple decades—the very high nominal price of oil relates to

the Federal Reserve’s failure to achieve price stability. And so, if

you are looking for the big picture, why are oil prices so high over

the last two decades, it has to be about Fed policy, because the Fed

is responsible for the nominal prices everywhere.

Mr. JORDAN. Right.

Mr. REINHART. OK. Now, if you are asking in the last year or so,

or over the whole profile of quantitative easing, I would say that

it is mostly something about the balance of real supply and demand; the Fed comes second. And I would put third speculation.

There has been a bit of discussion about the CFTC’s——

Mr. JORDAN. Right.

Mr. REINHART [continuing]. Ongoing case. And it is not appropriate to opine on an open case, but I think you would have to remember three important points. And the first is, in the futures

market, almost nothing settles in a cash transaction. That is, the

futures market is very large relative to the cash market. So trying

to manipulate cash to affect the futures market is the tail wagging

the dog.

But second, in a very short period, the tail can wag the dog. Even

in the CFTC’s press release of yesterday, they say it was a strategy

designed to first raise, then lower oil prices. So, in the short run,

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speculation can matter. But the short run, it can be, you know, relatively short.

But, third, we do have to worry about speculation in the market

because it raises volatility of prices, and that is just a deadweight

loss for everybody. It is just more expensive to use those markets

efficiently for hedging.

Mr. JORDAN. OK. Thank you.

The gentleman from Cleveland.

Mr. KUCINICH. I have heard the witnesses talk about the role of

the Fed here, and that is what has made this hearing very instructive. Because all of—you know, including Dr. Baker, all talk about

the Fed has some role here. You know, there might be some debate

about what kind of role, about where it falls in the hierarchy of

economic effects on the price of oil. You know, you talked about

supply and demand, then the Fed, and then speculation.

Mr. Reinhart, am I right in that? OK.

And we are talking about the Fed’s policy since 2008, you know,

the role that has had on the price.

But what hasn’t been discussed here and what I would like to

ask you to consider and maybe just give me some quick response

on is the fact that, in 1913, when the Federal Reserve was created,

it actually created the transition away from the Article I, Section

8 responsibilities that were constitutionally vested in Article I to

Congress for the purpose of coining money or controlling the money

supply. That was taken away. You know, the Fed ends up with the

responsibility.

So my question to you is, if we see that the variable effect and

sometimes the adverse effect which the Fed has in the management of these things, the question becomes, what about having the

Fed being put back in the control of the government, as the Founders intended? For example, being put under Treasury.

Would you comment on that? You know, if we are really talking

about the Fed as something that we really have very limited control over, what do you think of that?

Mr. REINHART. So, I see the Federal Reserve Act as a delegation

of congressional authority given to it in the Constitution to an independent agency, the Federal Reserve. Fundamental to that was the

implicit belief that independence would lead to better monetary

policy over the long run. Because there are short-run and long-run

considerations, something decided in the Congress lends itself to a

short-term gain and not enough assessment of the long-term benefit. The idea was giving the Fed independence so it can take account of the longer-run benefits of price stability.

I think the record is not good for the Federal Reserve in taking

account of that longer-run responsibility.

Mr. KUCINICH. Dr. Murphy, would you say the record is not good

over the long haul here, or what would you say?

Mr. MURPHY. Well, right, I mean, the Fed was created to get rid

of the ups and downs, and then after they formed it there was a

Great Depression. So, I mean, the Fed has not had a great track

record over its history.

As far as your broader question—and I am speaking on my own;

this isn’t an IER position on monetary policy, obviously—but I

don’t think the issue is, well, should it be Ben Bernanke right now

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making Fed policy or Treasury Secretary Geithner? I don’t—you

know, I think if you are going to——

Mr. KUCINICH. Well, I mean, there is some question about the

structures here of whether or not there is public accountability, responsibility. If you can print, you can use quantitative easing to

print an unlimited amount of money and basically, until recently,

in a nontransparent way, give it to banks who are too big to fail,

they can park their money, gain interest on it, and at the same

time you got businesses starving for cash in my area, there are

some public policy questions.

Go ahead.

Mr. MURPHY. Well, right. My point was, a lot of people—and I

would subscribe to this view—would say that there should be no

such entity that can just create a trillion dollars out of thin air and

hand it to rich people. That, you don’t need to say, well, who should

run this organization? There wasn’t always a Fed. So, you know,

if you are going to start questioning it, just go the full way.

Mr. KUCINICH. Dr. Baker, do you have any comment on that?

Mr. BAKER. Yeah, I mean, the Fed was set up almost a hundred

years ago, and I think its structure reflects both the power of the

financial sector and also the politics of 1913. I mean, it is sort of

striking, we have 12 regional Fed banks and two of them are in

Missouri. I don’t think anyone would set it up that way today.

The idea that you would give the financial industry, the banking

industry, a major, direct say in monetary policy—which the structure of the Fed does. It is not just that they have advice; they basically appoint 12 of the 19 people who sit on the Fed’s Open Market

Committee, 5 of the voting members—I think that is really hard

to justify.

So I think having the entity that controls monetary policy,

whether it is the Fed or we give a different name to it, I think having that directly answerable to Congress certainly makes sense.

And, you know, again, one could think of how best to structure

that.

I, for one, wouldn’t say I necessarily want, as much respect as

I have for the members of the committee, I don’t want the Members of Congress directly setting interest rate policy. But the analogy I would make is to the Food and Drug Administration, that,

you know, we expect that they are answerable to Congress.

Mr. KUCINICH. But I would tell you, back home, people have

skepticism and businesses have skepticism about letting the Fed

pass out, you know, free money to certain interest groups while

businesses on Main Street are starving. I mean, you know, that—

thanks. My time has run out. Thanks.

Mr. JORDAN. I just have one more question, but then I will give

the ranking member another round if he would like.

But in yesterday’s Wall Street Journal, Mr. Ronald McKinnon

from Stanford University, the Stanford Institute for Economic Policy Research—are you guys familiar with Mr. McKinnon? Yeah. He

wrote what I thought was an interesting piece. I actually read it

last night. He thinks stagflation is coming, maybe here. And he

makes the comment, which I think strongly reinforces what Dr.

Murphy and Mr. Reinhart said, ‘‘The Federal Reserve is the prime

contributor to the current bout with stagflation.’’

67

So I would just like your—we will go down the line here, too—

your thoughts on the piece Mr. McKinnon had in the Journal yesterday. And do you think that is where we are—this stagflation

concept, do you think we are headed back there?

Mr. REINHART. My wife Carmen and I wrote a paper in August

for the Fed Reserve-Kansas City’s Jackson Hole Symposium called,

‘‘After the Fall.’’ And what we documented was, after a severe financial crisis, economies grow more slowly than before for the entire decade—a point and a half slower in the decade after a crisis

than before the crisis.

So the real macroeconomy is going to probably be growing only

around the rate of growth of its potential. It is going to take a long

time for the unemployment rate to come down. In that environment, we are probably in for a spell of subpar economic performance.

Mr. JORDAN. Uh-huh.

Mr. REINHART. To the extent that we also lose the anchor of price

stability, then that would be a double dose of problems.

I don’t think right now the Fed will—that will necessarily happen. The Fed can be responsible for price stability. I think it could

have been more effective in its program of quantitative easing, but

I am not quite as pessimistic as Professor McKinnon.

Mr. JORDAN. Well, in Mr. McKinnon’s article, he points to the

same thing Dr. Murphy mentioned in his testimony, the tripling of

the money base. And I don’t see it offhand, but he makes some of

the same arguments.

Dr. Murphy, your comments on Mr. McKinnon’s piece?

Mr. MURPHY. I actually haven’t read that particular piece yet.

But, yeah, I mean, I have been for a while very concerned about

stagflation, that the policies, both the Federal Reserve and Federal

Government policies, the last few years would slow real economic

growth and also add inflationary fuel.

One thing I should have said before about speculators, if I could

just say one thing very briefly, is, I just want to remind people that

it can go both ways. For example, when President Bush, back in

I think it was July 2008, announced that he was going to end the

executive branch’s moratorium on offshore drilling, apparently oil

prices dropped $9 during the speech itself. OK?

Mr. JORDAN. Yeah.

Mr. MURPHY. So that is what I mean, that when people think

that there are future events that are going to affect the supply of

oil, that can drive prices.

Mr. JORDAN. And if the Congress of the United States would pass

legislation saying we are going to expand dramatically drilling and

exploration and get the resources out there, most likely that would

have an impact on the price of oil, not in the 8 to 10 years that

people say it takes to get the product to market, but when it is actually done, when the bill is passed.

Mr. MURPHY. Right. And the way that happens, it is not that

there is a time machine, it is that—if U.S. policymakers expedite

and give the green light so people think that U.S. production is

going to be higher in the future——

Mr. JORDAN. It sends a message.

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Mr. MURPHY [continuing]. Right, then current producers with access capacity, like Saudi Arabia, they increase current output.

Mr. JORDAN. Just like if we would actually cut spending and cap

spending and send a message to the market, that might actually

help maybe PIMCO get back in the Treasury market and Standard

& Poor’s change their outlook, right?

Mr. MURPHY. Right. So, yeah.

Mr. JORDAN. It sends a message. I mean, it is of critical importance. Thank you, Dr. Murphy.

Mr. Baker, we have to get back to my first question, Mr.

McKinnon’s analysis.

Mr. BAKER. Yeah, I have to say, I haven’t read the piece. But I

have to say, I am not very concerned about the prospect of the inflation side of the stagflation. I mean, if you look at the inflation

data, it almost all shows very low inflation. And in terms of market

expectations, we actually know that because we have futures, we

have inflation-indexed Treasury bonds. And those suggest that the

markets are anticipating 11⁄2 to 2 percent inflation well into the future.

So I am not concerned on the inflation part. I am very concerned

about bad policy giving us slow growth. And in the short term, I

don’t see any alternative to the deficits boosting the economy, because the private sector is not about—I certainly don’t see any

evidence——

Mr. JORDAN. Mr. Baker, let me ask you a question. If big government spending were going to get us out of this mess, don’t you

think we would have been out of it a while ago? In light of the fact

that, for the last 3 years, that is all the Congress, all the administration has done—more spending, more spending, almost 25 percent of GDP, record levels, haven’t been there since World War II,

quantitative easing policy, the tripling of the Fed’s balance sheet—

don’t you think it would have done a little better job than it has,

if that was the answer?

Mr. BAKER. Well, I think it has done a job. I think that, if you

look at the size of the——

Mr. JORDAN. Yeah, the job it has done is that we still have 8 percent unemployment in Ohio.

Mr. BAKER. And I think it would probably be 10 or 11 without

those actions.

Mr. JORDAN. It was.

Mr. BAKER. Well, it would still be, absent those actions.

We lost on the order of $1.2 trillion in annual demand with the

collapse of the housing bubble, between construction and the lost

consumption due to the disappearance of equity, home equity. So

that is what we are trying to counter with that.

The other part of the story, of course, when you look at trying

to rebalance the economy, the only way I see to do that in the long

term is with net exports, which involves a falling dollar. I don’t

know any other way to do that.

Mr. JORDAN. I ran over my time three times in a row.

Mr. Ranking Member, this will be the last round, but you can

take as long as you need.

Mr. KUCINICH. I want to——

Mr. JORDAN. Can I interject?

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Mr. KUCINICH. No, go ahead.

Mr. JORDAN. I need to enter the Committee on Oversight and

Government Reform report, the majority report, for the record.

Thank you.

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Mr. KUCINICH. I want to just begin by letting the chair know how

much appreciate the fact that you called this hearing, because

what I note is interesting is, you know, while the witnesses may

have some differences of opinion, the fact that there is concurrence

suggests that there may be the potential for an alliance between

conservatives in the House and those who are not conservative, or

even liberal, on some of these economic issues, especially with respect to the role of the Fed. That is not a small matter. And I appreciate that you called this.

Dr. Baker, could you take a few minutes to explain the relevance

of price inflation here and explain to us the relationship between

the price Americans see at the gas pump and the supply of money?

Do you have any thoughts on that?

Mr. BAKER. Well, in principle, what you can expect is that, in ordinary circumstances, gas prices rise with other prices. That is

clearly not the sort of story that we are seeing today. So a conventional story of inflation driven by the money supply is that we

throw out a lot of money, which we have done, and then, in response—and this has not happened—you would see all prices rising

more or less at the same rate. You shouldn’t expect to see changes

in relative prices.

So we see gas, depending what we want to use as our starting

point, but let’s say we go back to $2.50 a gallon and now we are

at $4, we seeing an increase on the order of 50 percent in the price

of gas. We don’t see anything like that almost anywhere else in the

economy. We don’t see that with rents, we don’t see that with medical services, we don’t see that with video equipment. I mean, pick

whatever you want to look at, we don’t see that.

So that suggests that something qualitatively different, something that has really very little to do with the supply of money is

affecting the price of gas.

Mr. KUCINICH. Well, pull that out. So what does that suggest to

you, then? I mean, I know you have said this before, but——

Mr. BAKER. So what I am saying is that, on the one hand, you

have sort of the fundamentals of the market playing a very important role; that you have had rapid growth in the developing world

that is increasing demand for oil. That is going to continue.

The second issue is the instability, which has, to some extent, affected the supply; it hasn’t hugely affected it, but to some extent

affected the supply. The instability in the Middle East, that could

turn out to be a major factor in terms of actually affecting the supply if it were the case, for example, that Libya’s oil were to come

off world markets, that we would lose the supply from there, or one

of the other major producers in the Middle East.

And then the third factor is simply that we clearly have some

speculation in the market. People are betting that prices will be

higher, and they are trying to take advantage of that and pick up

the gains. And that, at least temporarily, pulls oil off the market,

pushes up the price.

Mr. KUCINICH. I want to thank the chair for—and thank the witnesses for testifying. Those who represent trucking and businesses,

you know, we appreciate your presence here. I think the chair has

created a forum here for an important hearing.

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And I look forward to working with you as we continue to try to

find ways of letting our constituents know exactly what is going on

and, you know, what we can do about it to try to take a new direction.

And, you know, finally, one of the things that I have advocated

immediately with respect to the extraordinary profits that these oil

companies are getting in this climate—for example, you know,

Exxon, I think they had a $10.7 billion profit in a single quarter—

extraordinary—like, a 69 percent increase over the previous year,

which is already pretty high—is to think about a windfall profits

tax. You know, people have to make money, I got that. But when

you are gouging people, you shouldn’t get away with it.

So we should look for ways—and that wouldn’t be at the pump.

It would be on the profits. That is the difference. To try to find a

way to try to discipline the oil companies so they aren’t stealing

from our constituents.

So, I appreciate the chair’s opportunity to be here, and I look forward to continuing to work with you. Thank you.

Mr. JORDAN. I appreciate the ranking member’s comments and

input and help with the committee.

Just a quick response to the windfall profits suggestion. Probably

not going to go there, as you would expect. But I have yet to figure

out how raising taxes is going to lower gas prices. I just don’t see

how that is going to help Mr. Wannemacher in his business. I don’t

see how it is going to help the small-business owners Ms. Kerrigan

represents.

Mr. KUCINICH. By not raising the price at the pump.

Mr. JORDAN. I just don’t see how that is going to help our economy.

But I do want to thank our witnesses, particularly Mr.

Wannemacher and Ms. Kerrigan coming in and giving us the

small-business perspective, and our others on the Fed role and on

the broader economic concerns. Thank you for being with us. I

apologize again for having you have to stick around this late in the

afternoon. But thank you for being here today and giving us this

valuable testimony.

And we are adjourned.

[Whereupon, at 4:30 p.m., the subcommittee was adjourned.]

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