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FED OVERSIGHT: LACK OF TRANSPARENCY 

AND ACCOUNTABILITY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

JULY 14, 2015 

Printed for the use of the Committee on Financial Services 

Serial No. 114–41 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

SEAN P. DUFFY, Wisconsin, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

PETER T. KING, New York 

PATRICK T. MCHENRY, North Carolina 

ROBERT HURT, Virginia 

STEPHEN LEE FINCHER, Tennessee 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

ANN WAGNER, Missouri 

SCOTT TIPTON, Colorado 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

AL GREEN, Texas, Ranking Member 

MICHAEL E. CAPUANO, Massachusetts 

EMANUEL CLEAVER, Missouri 

KEITH ELLISON, Minnesota 

JOHN K. DELANEY, Maryland 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

KYRSTEN SINEMA, Arizona 

JUAN VARGAS, California 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

July 14, 2015 ..................................................................................................... 1 

Appendix: 

July 14, 2015 ..................................................................................................... 33 

WITNESSES 

TUESDAY, JULY 14, 2015 

Calabria, Mark A., Director, Financial Regulation Studies, Cato Institute ....... 4 

Kupiec, Paul H., Resident Scholar, American Enterprise Institute .................... 6 

Rivlin, Hon. Alice M., Senior Fellow, Economic Studies, Brookings Institution 9 

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

University ............................................................................................................. 8 

APPENDIX 

Prepared statements: 

Calabria, Mark A. ............................................................................................. 34 

Kupiec, Paul H. ................................................................................................. 47 

Rivlin, Hon. Alice M. ........................................................................................ 62 

Taylor, John B. ................................................................................................. 65 

(1) 

FED OVERSIGHT: LACK OF TRANSPARENCY 

AND ACCOUNTABILITY 

Tuesday, July 14, 2015 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Sean P. Duffy [chairman of the subcommittee] presiding. 

Members present: Representatives Duffy, Fitzpatrick, Hurt, 

Fincher, Mulvaney, Hultgren, Tipton, Poliquin, Hill; Green, 

Cleaver, Beatty, Heck, Sinema, and Vargas. 

Ex officio present: Representative Hensarling. 

Also present: Representative Love. 

Chairman DUFFY. The Oversight and Investigations Subcommittee will come to order. The title of today’s subcommittee 

hearing is, ‘‘Fed Oversight: Lack of Transparency and Accountability.’’ 

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

the subcommittee at any time. 

Also, without objection, members of the full Financial Services 

Committee who are not members of this subcommittee may participate in today’s hearing for the purposes of making an opening 

statement and questioning witnesses. 

The Chair now recognizes himself for 3 minutes for an opening 

statement. 

Since its creation over 100 years ago, the scope and authority of 

the Federal Reserve has grown exponentially. Following the 2008 

financial crisis, the Dodd-Frank Act dramatically expanded the 

Fed’s reach into the economy. Dodd-Frank granted the Fed the authority to set new capital liquidity standards, conduct stress tests, 

and regulate designated systemically important foreign and domestic firms that pose a threat to U.S. financial stability. These designations are determined by the Financial Stability Oversight 

Council, or FSOC, on which the Fed Chair sits. 

While these new powers alone are a significant increase in the 

Fed’s purview, the Fed also serves as a primary U.S. representative 

on the Financial Stability Board, the Basel Committee on Banking 

Supervision, and the International Association of Insurance Supervisors. Some market participants have expressed concern that the 

Fed may be showing deference to international regulatory preference rather than properly representing American interests. 

2 

For this reason and others, I introduced H.R. 2141, the International Insurance Standards Transparency and Policyholder Protection Act of 2015, and we are looking for cosponsors if any Dems 

want to join, Mr. Green. This bill will establish a much-needed 

framework for congressional oversight and stakeholder input while 

the Fed and others engage in international regulatory negotiations. 

While the Fed’s purview and power continues to grow, opacity 

reigns supreme within its walls. It is a fraternity where silence is 

golden. And no one, not even Congress, is allowed to ask questions. 

This is true not only of how it conducts monetary policy, but also 

of its internal processes. 

The Fed’s clamor for independence is the underpinning for its argument for circumventing any congressional accountability. Markets are left in the dark as much as Congress—unless, that is, you 

are one of the lucky, well-capitalized or well-connected firms that 

can afford non-public information from the black box that is the 

Fed. 

This committee worked tirelessly to investigate a 2012 leak of 

confidential FOMC information by one such Fed insider. That information was disseminated by Medley Global Advisors to their clients, which include some of the world’s top hedge funds, institutional investors, and asset managers. And yet, 3 years later, following 3 internal investigations by the Fed’s own General Counsel 

and the IG, and countless letters from Congress, we still don’t have 

any answers. 

While we will hear tomorrow from Chair Yellen on this and other 

matters, we are looking forward to hearing from our panel of distinguished witnesses today on this problematic epidemic culture of 

opacity at the Fed. 

With that, I yield 5 minutes to the ranking member of the subcommittee, Mr. Green from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. I thank the witnesses for 

appearing as well. And I am honored to have an opportunity to 

hopefully ask some questions that will give us all some additional 

insight. 

Having perused the legislation and perused materials associated 

with this hearing, I have come to the conclusion that this hearing 

is really less about the auditing of the operations of the Fed and 

more about monitoring the deliberations of the Fed, because the 

Fed is currently audited. And I will introduce information into the 

record to show that the operations of the Fed are audited. There 

is no question that the Fed is audited. The question is, should their 

deliberations be monitored? 

Having been a part of the judiciary for a number of years, I have 

come to appreciate deliberations that are held with a degree of privacy. When jurors deliberate, we don’t allow the cameras in the 

room, we don’t allow parties who are not associated with the jury 

to be in that room. Deliberations are important. You can get candid 

conversation, candid commentary when you don’t have a third 

party in the room. Deliberations are important. We go into executive sessions to have deliberations so that we can speak candidly 

about issues. This is really about the deliberations of the Fed. 

It is also more about the superintendency of the Fed than the 

transparency of the Fed, the superintendency in the sense that 

3 

there seems to be a desire to manage what the Fed does. We have 

oversight. We are not overseers of the Fed. And we should exercise 

our oversight authority. I fully support oversight of the Fed. But 

I don’t think we want Congress to oversee the Fed. I think it would 

be a mistake of the highest magnitude to allow what we do here 

to infect the Fed. 

We can barely make decisions. There is great stagnation. And 

there is a lot of politicization of what we do. Do we really want to 

politicize the Fed by injecting the decisions of Congress into their 

deliberations? 

I think also that as we go through this, it is going to be important for us to recognize that Congress has put the Fed in the position that it is in. The Fed has served us well. And at some point, 

the independence yielding to the interference can become outright 

meddling. Do we want to meddle in the deliberations of the Fed? 

I think not. 

Now, with reference to the leaks, the Department of Justice is investigating, and the Department of Justice has the tools to perform 

a proper investigation. The Department of Justice has indicated a 

desire to complete this investigation. I support a thorough investigation of these leaks, but I don’t want this investigation done by 

Congress to the extent that we encroach upon what the DOJ is 

doing and to the extent that we may, in some way, create a climate 

such that the DOJ won’t be able to perform its duties effectively. 

The DOJ has indicated that it would be prudent to withhold certain testimony until it has had an opportunity to complete its investigation. 

I want the investigation done. I support what the DOJ is doing. 

But I don’t want to find ourselves in the circumstance that we have 

with the CFPB, where Congress is taking the lead on an investigation and where we don’t have all of the due process in place that 

should be accorded people who are being investigated. 

I look forward to working with the subcommittee chairman. And 

if he can craft a piece of legislation that he and I can agree upon, 

of course I will sign on to it. 

I yield back. 

Chairman DUFFY. The gentleman yields back. I look forward to 

that. 

The Chair now recognizes the the vice chairman of this subcommittee, the gentleman from Pennsylvania, Mr. Fitzpatrick, for 

1 minute for an opening statement. 

Mr. FITZPATRICK. Thank you, Mr. Chairman, and I also thank 

the witnesses for being here with us today. 

Oversight of the Federal Government, whether it is agencies, individuals, or other institutions, is crucial to our system of checks 

and balances. The system provides an opportunity for democratically elected representatives to ensure these organizations are accountable to hard-working American families and ensure that their 

day-to-day operations are transparent. 

Today, this subcommittee’s role is to determine whether or not 

one such entity has grown too large or too rapidly without the expressed consent of the American people. Over the last 5 years, the 

Federal Reserve system of influence over the economy has grown 

through the development of new rules and requirements for our fiVerDate Nov 24 2008 11:57 Mar 18, 2016 Jkt 097153 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\97153.TXT TERI
4 

nancial institutions with little involvement or consultation by Congress. Furthermore, it is worth noting that while the Fed is 

charged with maintaining the economic health of our Nation, it has 

repeatedly ignored subpoenas and sidestepped congressional inquiries. 

Mr. Chairman, the Fed, like all of the Federal Government, 

should remain open, transparent, and accountable to the American 

people. 

I yield back. And I look forward to the witnesses’ testimony. 

Chairman DUFFY. The gentleman yields back. 

We now recognize our witnesses for introduction. First, Dr. Mark 

Calabria is the director of financial regulation studies at the Cato 

Institute. Before joining Cato in 2009, he spent 6 years as a member of the senior professional staff of the U.S. Senate Committee 

on Banking, Housing, and Urban Affairs, where I think they move 

just a bit slower, Dr. Calabria. 

Second, Dr. Paul Kupiec is a resident scholar at the American 

Enterprise Institute (AEI), where he studies systemic risk in the 

management and regulation of banks and financial markets. 

Third, we have Dr. John Taylor. He is the George P. Shultz Senior Fellow in Economics at the Hoover Institute and the Mary and 

Robert Raymond Professor of Economics at Stanford University. 

Dr. Taylor’s field of expertise includes monetary policy, fiscal policy, and international economics. 

And finally, we have the Honorable Alice Rivlin. She is the director of the Health Policy Center at the Brookings Institution and 

the Leonard D. Schaffer Chair in Health Policy. She is also a senior 

fellow in the Economic Studies Program at Brookings and a visiting professor at the McCourt School of Public Policy at Georgetown University. 

The witnesses will now be recognized for 5 minutes to give an 

oral presentation of their testimony. And without objection, the witnesses’ written statements will be made a part of the record. Once 

the witnesses have finished presenting their testimony, each member of the subcommittee will have 5 minutes within which to ask 

questions. 

On your table there are three lights. I think all of you are very 

familiar with this. Green means go, yellow means you have 1 

minute left, and red means your time is up. The microphones are 

very sensitive, so please make sure that you are speaking directly 

into them. 

With that, Dr. Calabria, you are now recognized for 5 minutes. 

STATEMENT OF MARK A. CALABRIA, DIRECTOR, FINANCIAL 

REGULATION STUDIES, CATO INSTITUTE 

Mr. CALABRIA. Thank you. Chairman Duffy, Ranking Member 

Green, and distinguished members of the subcommittee, thank you 

for the invitation to appear at today’s hearing. And let me also say 

what an honor it is to be part of such a distinguished panel. 

The word ‘‘accountability’’ is often used in Washington without 

reference to a clear meaning. So let me begin my remarks by citing 

Webster’s, which defines accountability as an obligation or willingness to accept responsibility or to account for one’s actions. 

5 

My fellow panelist, John Taylor, has detailed elsewhere how the 

Federal Reserves bears some responsibility for the boom and bust 

in the housing market that led to the financial crisis. I detail in 

my written remarks a number of Federal Reserve regulatory mistakes that also contributed to the crisis. Prominent among these 

was the Fed’s support of using credit default swaps to lower bank 

capital, the Fed’s push for adoption of Basel II, as well as the Fed’s 

approach of off-balance-sheet risk-taking by our largest banks. 

Inherent in being accountable is first coming to terms with one’s 

mistakes. I would submit to the subcommittee that we have yet to 

see the Fed atone or even admit to its contributions to the crisis. 

Instead, what we have seen is repeated spin by the Fed with the 

intent to distract us. 

In no way has the Fed been held accountable for its monetary 

regulatory mistakes. In fact, it has been rewarded by the DoddFrank Act with increasing powers and responsibilities. This is, of 

course, to say nothing of the personal rewards that its senior management has received despite their own culpability. 

The logic behind Dodd-Frank would lead us to believe that the 

same entity which believed it was wise to allow Citibank to hold 

tens of billions in off-balance-sheet risk without any capital backing 

that risk is best qualified to now conduct similar supervision of 

large non-banks like MetLife. 

Financial reform would have best been served, in my opinion, 

had prudential supervision been removed altogether from the Fed 

and placed at another agency, such as the FDIC. Researchers have 

found, for instance, that countries with central banks that are also 

engaged in bank regulation witness more frequent crises, as well 

as have greater levels of inflation. Dodd-Frank, to a small degree, 

held the Office of Thrift Supervision accountable for its failures, yet 

failed to do the same for the Federal Reserve. 

As detailed in my written remarks, Dodd-Frank did make some 

modest improvements in Fed transparency. I commend those. But 

those should, at best, be viewed as a beginning rather than an end. 

Professor Joseph Stiglitz has suggested that an important element of accountability for a central bank in a democracy is for its 

decisions to be representative of that society. Section 10 of the Federal Reserve Act attempts to manage a degree of representativeness with Board appointments. The ranking member referenced juries. I think we would all want to believe that juries should be representative of the population. So should the Federal Reserve. 

For instance, Section 10 prohibits having more than one board 

member from the same bank district. Unfortunately, that prohibition has been repeatedly violated. I suggest Congress remedy that 

by specifying the Act’s diversity requirements in greater detail. I 

will note, for instance, that the Board currently has only one member from a district west of the Mississippi River. The Board has 

over time come to be dominated by D.C. and New York interests, 

which reduces both its legitimacy and its effectiveness in conducting monetary policy. 

Greater oversight of the Fed is also merited given the expansions 

of its actions beyond monetary policy. Many of the Fed’s actions 

during the crisis were fiscal in nature, such as the rescue of AIG. 

Some monetary decisions, such as the purchase of agency mortVerDate Nov 24 2008 11:57 Mar 18, 2016 Jkt 097153 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\97153.TXT TERI
6 

gage-backed securities, also moved into the area of credit allocation. The more the Fed decides to pick winners and losers in our 

society, the greater the need for oversight by democratically elected 

officials. 

Ultimately, both transparency and accountability would be improved if the Fed’s behavior were more rule-bound. A large economics literature exists making the case for rules over discretion, to 

which my fellow panelist, Dr. Taylor, has contributed. 

There is related literature in behavioral economics and clinical 

psychology. Nobel-Prize-winning economist and psychologist Daniel 

Kahneman has documented the conditions under which we should 

prefer rules to discretion. His conclusion is, ‘‘To maximize predictive accuracy, final decisions should be left to formulas, especially in low-validity environments.’’ I would submit to the committee that monetary policy is the poster child for a low-validity 

environment. 

It is not simply a question of getting the right people to engage 

in monetary policy. Any set of experts will be subject to behavioral 

biases that will result in performance that would be inferior to 

rule-bound decision-making. 

Ulysses was wise enough to recognize his inability to resist the 

siren songs. If we hope to avoid our current cycle of asset booms 

and busts driven primarily by monetary policy, then we too must 

embrace that wisdom. 

I look forward to your questions and comments. Thank you. 

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

34 of the appendix.] 

Chairman DUFFY. The Chair now recognizes Dr. Kupiec for 5 

minutes for a summary of his statement. 

STATEMENT OF PAUL H. KUPIEC, RESIDENT SCHOLAR, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. KUPIEC. Chairman Duffy, Ranking Member Green, and distinguished members of the subcommittee, thank you for holding today’s hearing and for inviting me to testify. I have submitted detailed written testimony which I can only summarize in my oral remarks. 

The Federal Reserve was created by Congress, and Congress has 

the duty to oversee this creation. The Fed’s methods for implementing monetary policy have changed drastically since the 2008 

financial crisis. Many significant Fed policy changes merit deeper 

congressional investigation. 

Some of these include the FOMC’s recent decision, without congressional input, to reinterpret price stability to mean annual expected inflation of 2 percent; the practice of continuously re-defining the target rate of unemployment that will trigger higher interest rates; claims that the prolonged zero-interest-rate policy promotes economic growth without creating conditions that lead to serious financial instabilities; and credible assurances that the Fed’s 

dual mandate of price stability and maximum employment will not 

be sacrificed to international pressures should financial market 

panics occur in Europe, Asia, or elsewhere. 

Many Federal Reserve regulatory activities also merit closer congressional oversight. For example, Congress should exercise much 

7 

closer oversight over the Fed’s involvement with international 

standard-setting bodies, particularly the Financial Stability Board 

(FSB). The Fed is a key member of the FSB. The FSB formulates 

global financial stability policies, it designates globally systemically 

financial institutions, and it crafts international supervision agreements for their regulation and the regulation of international financial markets and institutions, and it sets capital regulations for 

these firms. 

The FSB’s goal is to impose uniform international financial stability policies on its members, and so it is no coincidence that FSB 

agreements subsequently become U.S. financial regulatory policy. 

The Fed should inform appropriate congressional committees before 

it negotiates and finalizes FSB policy directives, as these directives 

look a lot like international treaties, at least to me. 

To date, FSB designations have presaged all FSOC designation 

decisions, which raises questions about the integrity and independence of the FSOC designation process. The FSB, you may recall, 

published a list of insurance G-SIFIs, and later these same G-SIFIs 

were designated by the FSOC despite protests from multiple U.S. 

insurance regulators. Many assume that this pattern will be repeated when the FSOC addresses shadow banking and other insurance designations. 

In a second example, Congress should examine the recurring Fed 

holding company stress tests mandated by Section 165 of the DoddFrank Act. These stress tests are very expensive, both for banks 

and for bank regulators, and yet there is no evidence that these 

tests are a cost-effective method for supervising individual financial 

institutions or for identifying hidden risks in the financial sector. 

Since stress test models have large estimation errors, Fed stress 

test outcomes are at best merely wild guesses (WAGs) of how these 

individual institutions will perform under imaginary stress conditions. Under the stress tests, the Fed imposes individualized regulatory requirements on institutions. Sometimes these are punitive, 

but there is no mechanism to appeal disputed Fed judgments to 

independent arbitration. 

The arbitrary and uncertain character of these tests makes it difficult for banks to anticipate their capital needs and plan for the 

future. 

Congress should also exercise much closer oversight over the 

Fed’s new regulatory responsibilities in the insurance industry. The 

Fed is now examining insurers that have long been examined and 

are still being examined by State insurance supervisors. About onethird of the insurance industry is now facing Federal Reserve supervision. For these firms, the Fed is now imposing bank holding 

company standards on top of the capital standards set by State insurance regulators. 

The Fed is also involved in international bodies that set international capital standards for insurers, and there is fear within the 

industry that bank-like capital standards will be imposed on insurance firms throughout the United States. 

The Dodd-Frank framers were careful not to create a national insurance regulator, and yet the Fed is taking steps that make it, de 

facto, a national insurance regulator. 

8 

The Fed is also opaque on a number of other issues. It sets its 

own accounting standards, and these standards deviate from generally accepted accounting principles (GAAP) in ways that may obscure the Fed’s true financial condition, especially when interest 

rates begin to rise to more normal levels. 

They also act as if they are shielded from disclosing operational 

details that are routinely disclosed by other government agencies, 

for example, information on staff salaries, benefits, and hiring practices, and most recently by refusing to answer congressional requests for information on Fed investigations into FOMC information leaks. 

Congress must step up oversight, and insist on greater Fed 

transparency. 

Thank you. 

[The prepared statement of Dr. Kupiec can be found on page 47 

of the appendix. ] 

Chairman DUFFY. Thank you. 

The Chair now recognizes Dr. Taylor for 5 minutes for a summary of your statement. 

STATEMENT OF JOHN B. TAYLOR, MARY AND ROBERT RAYMOND PROFESSOR OF ECONOMICS, STANFORD UNIVERSITY 

Mr. TAYLOR. Thank you, Mr. Chairman, and members of the subcommittee, for inviting me to testify today. 

One of the, I think, most productive ways to assess the committee’s and the Congress’ concern about lack of transparency and accountability at the Fed is to look at the trends and what has happened in recent years. 

As I look back, I see that one of the most important transparency 

and accountability reforms, say in the last quarter century, was the 

Fed simply announcing its target for the Federal Funds Rate. That 

was in 1994. Before that, people had to guess what the target was; 

they had to read the tea leaves. And I think that lack of transparency gave an advantage to those who were able to get the information. It also caused considerable confusion about what the target 

was. The reform fixed that. 

The Fed took a number of additional steps in more recent years, 

I think, to increase transparency, including releasing projections of 

forecasts and interest rates, holding quarterly press conferences, 

announcing a numerical target of 2 percent for the inflation rate. 

However, there have been important countervailing trends, in my 

view. For example, in 2000 the Fed stopped reporting ranges for future growth of the money supply as part of its policy, removed 

those as part of the process when the requirement to report was 

removed from the Federal Reserve Act by the Congress. While 

dropping reporting about money growth might not seem that significant, I think it is symptomatic of a broader lack of transparency 

about the Fed’s reporting its strategy for the instruments of policy, 

whether it is money growth, the Federal funds rate, or some of 

these unconventional policies, such as quantitative easing. 

One reason that there has been a reluctance of the Fed to report 

or be transparent about its strategy for setting these instruments 

in some of the newer tools, the unconventional tools, is that it is 

very difficult to do so. With regard to unconventional tools, their 

9 

estimated effects are uncertain. There is disagreement. It is very 

hard to stipulate a strategy. In fact, some Governors have tried to 

do that and have found it very difficult. To me, that is a clear disadvantage of these unconventional tools. 

But another reason to be reluctant on the part of the Fed reporting its strategy is it thinks that simply setting the goals for inflation or other variables is sufficient. I think that is an incorrect 

view. I think you need to stipulate the strategy. 

May I bring the committee’s attention to the Fed’s statement of 

longer-term goals and monetary policy strategies, a particular document the Fed has released in 2012 and has updated? If you look 

at that document, you can see that the goals are stated, such as 

the 2 percent inflation rate, but there is no strategy, despite the 

title of the document, for achieving those goals. 

At least, it seems to me, the Fed should be reporting its strategy, 

certainly the rules or strategy that it uses internally. That is simply a matter of transparency. It is hard to see how one would object 

to that. 

I also think this current environment, where there is a lack of 

transparency about the strategy, creates the possibility where some 

can benefit and some can’t from the lack of information. I think the 

controversy over the alleged leak of information in October 2012, 

is an example of this. Again, since it is so hard to formulate a 

strategy, it inevitably becomes something where people want the 

latest information about the unconventional policy. And I think 

that is the nature of that alleged leak back in 2012. 

If there were a clear and publicly announced strategy for setting 

the instruments of policy, I think these kinds of events would be 

far less likely. The information would be available to all, and it 

would be as close as we can come to doing that. 

So in sum, while changes at the Fed, such as the establishment 

and announcement of a numerical inflation goal, have increased 

transparency and accountability in recent years, as is frequently 

emphasized, I think a reluctance to establish and announce a strategy to achieve those goals has created an important offsetting countervailing trend. So in my view, the resulting lack of transparency 

and accountability mentioned in the title of this hearing needs to 

be reversed. 

Thank you. 

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

of the appendix.] 

Chairman DUFFY. Thank you, Dr. Taylor. 

The Chair now recognized Dr. Rivlin for 5 minutes for a summary of your testimony. 

STATEMENT OF THE HONORABLE ALICE M. RIVLIN, SENIOR 

FELLOW, ECONOMIC STUDIES, BROOKINGS INSTITUTION 

Ms. RIVLIN. Thank you, Mr. Chairman, and Ranking Member 

Green. I am delighted to be back in this room again. The last time 

I was here, I was actually invited to the full committee by Chairman Hensarling. So I have switched sides. 

The premise of this hearing appears to be that there is something mysterious and opaque about the Federal Reserve’s conduct 

of monetary policy and some threat to our economy might unfold 

10 

out of view of the Congress and the public, and if another group 

of experts appointed by the Congress were to get in there, we 

would learn something important and be better off. My views are 

quite different, and let me make three basic points. 

First, current monetary policy alternatives are controversial, but 

they are not mysterious or opaque, and Federal Reserve officials 

are making extraordinary efforts to explain to Congress and the 

public the dilemmas that they face. Right now, the Fed is making 

a fairly simple choice. It is deciding when to raise interest rates, 

short-term interest rates, and how fast to do that. Like a lot of 

monetary policy decisions, this is a judgment call, views differ—I 

am sure they differ on this panel—and you can make an argument 

on both sides. 

But I don’t think the Fed is being at all mysterious about this. 

Besides the advances in transparency that Dr. Taylor alluded to, 

the minutes are much more explicit than they used to be, they 

come out sooner, the Chair and other Fed officials explain their 

views frequently and lucidly in speeches. The Chair made a dandy 

speech in Cleveland this week. She will be here tomorrow. She answers questions endlessly. She holds press conferences after the 

FOMC. 

There was a time, when I was at the Fed in the 1990s as Vice 

Chair, that we were a lot more mysterious. But there has been a 

lot of progress. 

Second, I think nothing terrible or irreversible is likely to happen 

if the Fed acts too quickly or too slowly at the moment. The threats 

to our future prosperity are much more likely to come from fiscal 

gridlock. 

At the moment, inflation is not a danger. It is very hard to see 

any way that inflation could take off suddenly and get out of hand. 

Our economy is simply much less inflation-prone than it used to be. 

Unfortunately, the dominant scenario for the future is slow 

growth in the labor force and in productivity. Fiscal policy has a 

chance to turn that around by investing in infrastructure and 

science and in the skills of the labor force and by offsetting those 

investments with long-term control of our rising debt. I think that 

is a very great responsibility, and it is a responsibility of the Congress and the President, not the Fed. 

Third, monetary policy decisions can be politically unpopular, 

and the creators of the Fed were wise to insulate those decisions 

from political pressure. Injecting another group to second-guess 

monetary policy decisions would undermine an independent agency 

which is working hard to do what Congress created it to do. 

Monetary policy decisions are hard, and they have often been 

made mistakenly. I wouldn’t say the Fed has always been right. 

But they are hard, and often the important thing to do is very unpopular. And it is for that reason that I think the Congress should 

not want and did not want when it created the Federal Reserve to 

make monetary policy itself. Delegating monetary policy to an independent body was a sound idea, and it is working quite well, so I 

would advise you to leave well enough alone. 

Thank you. 

[The prepared statement of Dr. Rivlin can be found on page 62 

of the appendix.] 

11 

Chairman DUFFY. I appreciate the panel’s testimony. The Chair 

now recognizes himself for 5 minutes for questions. 

I want to talk about the Medley leak to start. Here you have a 

well-connected group that is able to access private information. The 

way we learned about it is because they stupidly sent out an email 

the day before to everybody with this private information, which 

begs the question, does this happen more often than we actually 

hear about? 

But I think in regard to transparency, I don’t usually agree with 

Elizabeth Warren, but when she talks about the game being rigged, 

isn’t this a perfect example of where if you are powerful, if you are 

well-connected, the game is rigged against those who aren’t? You 

can get information from insiders at the Fed if you are well-connected, but if you are not, you are like the rest of us without good 

quality information that comes from the inside. 

Am I wrong on that, Dr. Calabria? 

Mr. CALABRIA. I think you are absolutely right on that. And I 

want to emphasize something that Dr. Taylor touched upon, which 

is, if we had a predictable rules-bound policy that any outside objective observer could figure out the direction of the Fed, then the 

value of these leaks and trying to gather inside information declines. 

Chairman DUFFY. It takes away the incentive to game the system, right? It takes away the power of those who are well-connected as opposed to everyone being treated fairly. Am I correct on 

that? 

Mr. CALABRIA. Yes, Absolutely. 

Chairman DUFFY. Dr. Taylor, do you agree? 

Mr. TAYLOR. I think, Mr. Chairman, you listed some of the concerns that there are about having leaks. That is why there should 

be efforts to prevent that. It does give certain people advantages 

and leads to concerns about connections. 

Chairman DUFFY. Dr. Kupiec? 

Mr. KUPIEC. It certainly would make the problem less severe. I 

think if there is a monetary rule, if the Fed were bound by some 

of Dr. Taylor’s suggestions, they would still deviate from the monetary rule from time to time and inside information would still be 

valuable, but it wouldn’t be to the same degree that it is today. It 

would be far more predictable and there would be less ability to 

sell inside information. 

Chairman DUFFY. Dr. Rivlin? 

Ms. RIVLIN. Leaks are a bad thing no matter what your strategy 

for making monetary policy. There is no excuse for leaks, and they 

ought to be ferreted out and punished. 

Chairman DUFFY. And would transparency, in some of the reforms we have been talking about, help with the lack of need for 

that insider information? 

Ms. RIVLIN. No, I don’t think so. As long as the Federal Reserve 

is charged with setting short-term interest rates, there are people 

who are going to profit from knowing that information in advance, 

and they should not have it. 

Chairman DUFFY. In regard to congressional oversight, Dr. 

Rivlin, I am not sure if you followed the leak at all, but we have 

12 

asked continuously for information in regard to the internal investigation at the Fed. We have asked for information from the IG. 

Now, this is not about monetary policy, contrary to what the 

ranking member was talking about, this is about our investigation 

into the leak. You would agree that Congress has the right to oversee internal policy inside the Fed in regard to these leaks, what 

kind of investigation they did, what kind of recommendations they 

gave to the FBI or to their IG, you would agree with that, correct? 

Ms. RIVLIN. I am not an expert on how you prosecute leaks. They 

have turned it over to the Justice Department, which seems to me 

appropriate. 

Chairman DUFFY. But you are not saying that Congress doesn’t 

have a role to garner information, right? 

Ms. RIVLIN. Congress certainly has a role, but I am not sure that 

second-guessing the Justice Department when it is trying to investigate a leak is a productive thing to do. 

Chairman DUFFY. I would just point out that no one is secondguessing Justice. But Justice doesn’t prohibit Congress from accessing information. An IG investigation doesn’t prohibit Congress from 

accessing information. It is pretty clear that we are entitled to do 

a complementary investigation of anyone else who is doing one out 

there in regard to these leaks. 

It is serious stuff. And, frankly, the length of time it has taken 

to actually get the ball rolling on an investigation concerns many 

of us. And the fact that we are 3 years later and only by congressional push do we have people actually looking into the leak, I 

think the evidence would show that some folks inside the Fed 

wanted to sweep it under the rug. 

Quickly, Dr. Taylor, you have expressed your concern in regard 

to transparency in how the Fed operates and implements monetary 

policy. We have been talking about this FOMC leak from 2012. Do 

you see a connection between those two? 

Mr. TAYLOR. I do, because if there is really no way to describe 

the strategy of the Fed, if it is completely discretionary, if there is 

a decision which is made each time that is unrelated to the previous ones, yes, it creates the opportunity for more things to be selectively leaked out. 

So I think the more transparent the Fed can be with respect to 

its strategy or its operations, the less chance there is for such leaking. It doesn’t eliminate it, of course. There have to be ways to prevent it and take actions if it occurs. But it reduces the chances. 

Chairman DUFFY. Thank you. 

My time has expired. The Chair now recognizes the gentleman 

from Missouri, Mr. Cleaver, for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Dr. Calabria, let me just tell you how strongly I support your 

concern about members of the Fed west of the Mississippi, in spite 

of the fact that my State is the only State with two Fed offices. But 

the reason I do has nothing to do with this hearing except for the 

fact that the Federal Government leans to the East Coast in almost 

everything, including spending. 

And that is why I am an obsessed person as it relates to earmarks. It is one of the dumbest things that I think we could do, 

is say I was elected by Congress and the Constitution gives us the 

13 

right to spend, but we are going to give it to the President and the 

Administration. 

And the money continues to lean toward the East Coast. It 

doesn’t cost the taxpayers one penny more than what the budget 

is approved for operation. But all of this misinformation is out in 

the world, and we are going to continue until we change the lean 

to the East Coast. And I don’t intend to live on the East Coast. 

There are some nice people there. I am not mad at any of them, 

just as I am not upset with you from our last meeting. 

But the other thing is, I also think that it is important for us 

to all make sure we understand that this is not about who supports 

trying to investigate the leak. In my real life, I am a United Methodist pastor. If you leak information, if you talk about confidentiality, the bishops, you are out of the church. So I feel very strongly about it, and I think we ought to prosecute to the fullest extent 

if the FBI can get to the bottom of this. The other thing is, I support the chairman in calling for this investigation and information 

to come to this committee. 

My concern, though, is that I think—we almost had a bill approved, the Federal Reserve Transparency Act, which required a 

number of audits, some of the things that we have been talking 

about here. The chairman might remember—and it was bipartisan, 

incidentally, strongly bipartisan, not the normal stuff that we say 

bipartisan when it is one Member from the other side. I think we 

had almost 100 Democrats on the bill. It was introduced, as I recall, by Ron Paul. 

And we were going to pass it up until the last day, until there 

was an amendment by Congressman Watt from Charlotte. And I 

think that if we have a spirit of working together again, we could 

probably deal with some of the issues about which we may have 

some mutual concern. 

But my question is, and I would like to ask Dr. Taylor, if not the 

Fed, then who? We have a number of responsibilities that must be 

operated to preserve our economy, and if the Fed doesn’t do the 

monetary and credit oversight or the supervision and regulation of 

banking or providing financial services to depository institution, 

who does it? Do we just forget it? Or do we pass it on to another 

agency? What happens? 

Mr. TAYLOR. There is no question that with respect to monetary 

policy, the Fed has the responsibility. And Congress has oversight. 

But it has been given that responsibility. And I think that, in principle, is the way it should be. 

When you go beyond monetary policy to regulatory matters, then 

there are, of course, other agencies, Federal agencies and State 

agencies who can, and sometimes they are better off doing this. 

There seems to me a disadvantage to having one agency do everything. It creates more power than I think is necessary. So, there 

has been a delegation to different agencies, some Federal, and in 

our system, some State. It seems to me that makes sense. 

One can worry about how that organization takes place. So one 

of the things that happened in Dodd-Frank was to merge the Office 

of Thrift Supervision into the Comptroller’s Office. That made 

sense. There was some bringing together of things that shouldn’t 

14 

have been separate. So you can think about it, but it seems to me, 

with respect to monetary policy, the Fed has the responsibility. 

I would add one thing. If an agency expands its mission, what 

is frequently called mission creep, then I think there is a concern. 

We have in our system a way to separate powers, that Congress 

has roles for appropriation, for example. 

And I would just add perhaps on the side to your question about 

putting the agency in charge of the financial issues in the Fed, 

without the scrutiny of the appropriation process, seems to be not 

in the direction, that is in a sense giving extra power to an agency, 

talking about the Consumer Financial Protection Bureau, of course, 

which doesn’t seem appropriate. 

Mr. FITZPATRICK [presiding]. The gentleman’s time has expired. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Mr. FITZPATRICK. The Chair recognizes himself for 5 minutes. 

Chair Yellen, who will be before the full committee tomorrow, 

has recently admitted that she had a meeting with Medley Global 

Advisors. They are, of course, the political intelligence firm that obtained the leaked information, FOMC information. 

Dr. Calabria, should members of the Board of Governors of the 

Federal Reserve be speaking with political intelligence firms who 

are in the business of selling their clients access to the political decision-makers? 

Mr. CALABRIA. I lean toward feeling the Fed should be open to 

meeting with just about anybody who wants to meet with the Fed. 

I think the importance is, you have to be aware of when you are 

meeting. And, again, it is very difficult when you are having a conversation with somebody to be guarded about what you say. But I 

do think that if the Fed is going to meet with political intelligence 

firms or market analysts in general, it has to sit down with the understanding of it is really there more to listen than to say anything. 

Mr. FITZPATRICK. Dr. Kupiec, what are the risks? 

Mr. KUPIEC. Pardon me? 

Mr. FITZPATRICK. What are the risks? 

Mr. KUPIEC. I think the risks are what you see now. I think 

there have to be limits on this, definitely. I worked at the Federal 

Reserve for 10 years, so I am very familiar with what goes on. I 

saw past division directors who went to work for Wall Street firms 

or intelligence firms regularly come back and talk with Governors 

and all of that seemed highly inappropriate to me. 

I share Mark’s opinion that the Federal Reserve in its communications with the public in general has to meet with people who 

want to meet with it occasionally, but you can limit these things. 

For example, Federal Reserve Governors—according to the Government Sunshine Act, you can’t have more than, I forget how many, 

three or four of them meeting at any one time or it has to be declared a meeting. So they can’t even talk with the other Governors 

in private. So I think there are definitely rules that could be put 

in place to limit this. 

Mr. FITZPATRICK. Dr. Kupiec, in your written testimony you 

wrote that the practice of continuously redefining the Fed’s target 

rate of unemployment that is consistent with ‘‘maximum employment and price stability,’’ you indicated that is a change in moneVerDate Nov 24 2008 11:57 Mar 18, 2016 Jkt 097153 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\97153.TXT TERI
15 

tary policy that would mandate a required deeper congressional 

oversight or investigation. 

Mr. KUPIEC. I think the Fed has changed its operating policies 

to such a degree since 2008, and many of these things are big 

deals. The QE policies. Their mandate is price stability, yet in 2014 

they redefined price stability to be 2 percent annual target inflation 

rate. Now, inflation targeting is common, but they did that without 

any consultation with Congress, without any discussion. 

Price stability is not the same thing as a constant inflation rate. 

Those are not the same things. There should have been discussion. 

There should have been oversight. There should have been consultation. 

The unemployment rate, it is the thing that we discuss over and 

over again. One of these days, we are going to hit the right unemployment rate in the next 2, 3, 4, however many years, where the 

Fed is going to raise rates. But there is no way you can tell from 

the discussion that goes on what the target rate is. 

So this interjects the uncertainty. It gives rise to the insider information and the problems we see. Something that is more constrained by some kind of stated target would be much more acceptable or at least some discussion with Congress about that. 

Mr. FITZPATRICK. Dr. Calabria, increasingly it seems that our 

regulatory regime is being dictated by international organizations—one example is the G20’s Financial Stability Board—instead 

of organizations that would be more inclined to promote the interests of the United States of America. Why do you think this is occurring? 

Mr. CALABRIA. I certainly think we need to be very concerned 

when you see these designations, then therefore FSOC follows up 

and the pressure comes there. So certainly as a start, in my opinion, the U.S. representative should not be voting for any sort of delegation of a U.S. firm that FSOC itself has not already voted on. 

The process needs to start there rather than the other way around. 

Certainly, and we saw this come out during the trade debates 

and it is just as relevant here, the extent to which we actually see 

these regulatory bodies engage in treaty-making. And I think that 

is a very real concern and there has to be vigorous oversight of that 

area. 

Mr. FITZPATRICK. What are the long-term risks of ceding the authority? 

Mr. CALABRIA. I think the risk there is that you get decisions 

made that aren’t necessarily democratically accountable. You don’t 

get decisions that are input from other regulators. So FSOC, for instance, was meant to be a process where the other regulators 

would have some input. So, for instance, when the Federal Reserve 

might go to the Financial Stability Board and discuss insurance 

companies without having the insurance representatives of FSOC 

as part of that process, that cuts out that ability for FSOC to be 

truly representative of the agencies in question. 

I am not a fan of FSOC, but we decided to set it up, and we decided to set it up to concentrate this decision-making in that body, 

and therefore the Fed and Treasury and others should not be making decisions that are within its jurisdiction. 

Mr. FITZPATRICK. Thank you for your response. 

16 

The Chair now recognizes the gentleman from Virginia, Mr. 

Hurt, for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. 

I thank the members of this panel for joining us today. I had a 

question that might be a little larger than looking at specific situations where we need more accountability in a granular level. I was 

struck by a phrase that you used, Dr. Calabria, in terms of the role 

of a central bank in a democracy, the role of a central bank in a 

democracy. And I start from going to our Constitution, which of 

course sets out our legislative powers in Article I and the executive 

powers in Article II. 

As we have seen over recent years, and this has been of course 

exaggerated by the Dodd-Frank Act, the Fed has an enhanced role 

in policymaking, more regulatory powers, more policymaking powers, as opposed to just monetary policy. 

Yesterday, Chairman Neugebauer hosted a roundtable on the 

issue of liquidity in the corporate bond market. And the question 

of course is whether or not the market is liquid and can withstand 

future stress and the risk that poses to pensioners and, ultimately, 

to taxpayers. 

I think it is ironic, and I think my constituents in Virginia’s Fifth 

District would find it ironic that you look at a housing policy prior 

to 2008 that fueled a bubble that burst and left homeowners and 

taxpayers on the hook. Here, in response to the crisis in 2008, we 

have a zero-interest-rate policy that has fueled a corporate bond 

market or bond issuance on the one hand, and now you have the 

Federal Reserve playing a major role with the right hand in strangling that capacity to be able to absorb those issues in the marketplace. 

And so I guess my question, and I would ask Ms. Rivlin to begin 

and then go to Dr. Taylor and then Dr. Calabria, but from the larger standpoint, from a structural standpoint, should we be concerned about this, about the amount of power that the Federal Reserve has as part of the policymaking that has such an important 

effect on our economy? And where is the accountability to the 

American people who ultimately should hold policymakers accountable? 

Ms. RIVLIN. Yes, I think you should be concerned about it. I do 

believe you need to set monetary policy, an independent central 

bank, and we have one. 

With respect to regulatory policy, I think there are some serious 

issues here. When you passed Dodd-Frank you opted to, for a very 

complicated structure, keep a lot of the supervision and regulation 

in the plethora of agencies that were doing it, only abolishing one, 

creating the FSOC, and giving the Fed responsibility, which I think 

is appropriate, for major systemic risk. But the situation is very 

complicated. When I originally testified on Dodd-Frank, I was more 

in the Dodd camp, that you should consolidate the regulators. 

Mr. HURT. And I don’t mean to cut you off, but I would say that 

the question is, I don’t think the Constitution in Article I says that 

Congress has power to legislate in everything except complicated 

matters. And I guess that is my concern. 

Dr. Taylor, and then Dr. Calabria? 

17 

Mr. TAYLOR. I would just say, yes, I agree completely, you should 

be concerned about overreach. I think just one of the things, for example, that has concerned me is some of the unconventional policies where massive purchases of mortgage-backed securities. It 

seems to me that is beyond the usual purview and does get into 

the area of credit policy and fiscal policy of the Congress. 

Mr. CALABRIA. I certainly share those concerns. As I mentioned 

earlier, I would get the Fed out of bank regulation. Certainly, there 

are going to be some downsides to that, but I think the upsides are 

better, and I think it would actually improve the independence of 

monetary policy. And of course try to get the Fed out of things that 

clearly look fiscal will keep them out of some of these arguments. 

Mr. HURT. Thank you. I yield back my time. 

Mr. FITZPATRICK. The gentleman’s time has expired. 

The Chair recognizes the gentleman from South Carolina, Mr. 

Mulvaney, for 5 minutes. 

Mr. MULVANEY. I thank the gentleman. And I thank all of the 

panelists for doing something that I welcome the opportunity to do, 

which is to sit and talk about an issue for a while, as opposed to 

try and make political points. 

Ms. Rivlin, during your opening statement you said something 

that I thought was very accurate and very insightful, but I hope 

you understand that there is another side of the coin, which is you 

mentioned the importance of the Fed, the independence of the Fed 

in making monetary policy and making politically unpopular decisions. 

I think that the difficulty that many of us perceive on this side 

of the aisle is that hasn’t happened nearly enough for the last 8 

years and that the risk that we see is that the Fed will lose its 

ability to make unpopular decisions and simply make a bunch of 

popular decisions. It has been easy politically to keep rates at zero 

for a long period of time, along with some other decisions that they 

have made. 

So we are worried about the Fed’s ability to do exactly what you 

just talked about, which is make difficult decisions, especially when 

it comes to Wall Street. 

Would you agree with me, by the way, Ms. Rivlin, and I am just 

thinking off the top of my head, that sometimes you will be called 

upon to make, at the Fed, decisions that are bad for Wall Street? 

Or do you think that what is good for Wall Street is what is good 

for the country? 

Ms. RIVLIN. I think it is a question of long run and short run. 

Whoever regulates Wall Street has an enormous responsibility to 

avoid what happened in 2008. We can’t afford that again. And I 

think that regulation, if a bubble is imminent or on the horizon, 

is going to be seen as inimical to Wall Street. It will involve raising 

capital standards and limiting liquidity, all of those things the big 

banks will say is terrible. They will need to be done to avoid another crash. And in the long run, Wall Street and Main Street benefit from having a strong economy and one that does not repeat the 

mistakes of 2008. 

Mr. MULVANEY. And certainly I agree with that. I guess I just 

ask you to consider as you go forward and you look at this issue 

that some of us, myself included, are concerned about what we perVerDate Nov 24 2008 11:57 Mar 18, 2016 Jkt 097153 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\97153.TXT TERI
18 

ceive as, this is not the right word, but the parallel would be regulatory capture within the regulatory agencies, that the Fed becomes so close to Wall Street that it becomes incapable of making 

a decision that would be against the short-term interests of some 

of the folks whom it oversees. 

But that is not what I want to talk about. Dr. Kupiec, I want 

to talk about what we came here today to talk about, which is some 

of the things we can do better going forward on Fed oversight. And 

you mentioned something that was of interest to me. We have had 

a couple of hearings these past months on the IMF, and you said 

to pay closer attention to the international regulatory bodies. Tell 

us a little bit more about that and what you think we might be 

able to do on that front. 

Mr. KUPIEC. I think there have been bills already introduced that 

would require, in the Senate at least I think the bill was introduced, that would require the Federal Reserve to give the appropriate committees notice before they go to negotiate on international agreements on capital or G-SIFI or anything like that, and 

give appropriate notice to Congress and the public, and to come 

back and report on the outcome of these negotiations. And I think 

steps like that would be very helpful. 

Mr. MULVANEY. Have you ever given any thought to the role that 

the international groups play on monetary policy? I saw something 

that I guess is not unusual, I have not paid any attention to it before. About 2 weeks ago, the IMF came out with, not a recommendation, but a view that the Fed shouldn’t raise interest 

rates, it would be bad for the U.S. economy and the global economy. Should we be concerned or at least should we be paying attention to the types of exterior influences that those groups have on 

the Fed? 

Mr. KUPIEC. I think the Fed demonstrated in 2008 it was really 

the central bank to the world. And I think these international pressures to influence domestic monetary policy, policy that should be 

targeted at domestic U.S. interests, will come. 

And I think you could interpret the Lagarde comments, the IMF 

comments two ways. It could be giving the Federal Reserve cover 

not to raise rates, even though they had telegraphed it for the last 

so many years that eventually rates would rise and it gives the Fed 

an excuse not to raise rates. But you could look at it the other way, 

that there will be international pressures. I think in the future, 

when other parts of the world stumble badly and they want dollar 

liquidity, there will be push to have the Federal Reserve act. 

Mr. MULVANEY. Dr. Taylor, very quickly, because I have very little time, you mentioned in your opening statement about the new 

document, the statement of long-term goals and monetary strategy, 

and you said that it was a little short on strategy. What would the 

objections be, do you think, sir, to doing what you suggested, which 

is being more articulate in strategy going forward? 

Mr. TAYLOR. One objection is that they say we don’t need to tell 

you our strategy, we just tell you our goals and you let us do whatever it takes to achieve the goals. It is a view, I disagree with that, 

but that is what has been stated—look, we gave you the goals, 

what more do you want? I think in a way, the goals distract. They 

are good, but they can distract from what the strategy is. 

19 

Mr. MULVANEY. Thank you. 

And back to the original point, Mr. Chairman, I think what concerns me is that when they don’t lay out the strategy, we do end 

up with these extraordinary measures that we didn’t even know 

were on the table. Taking a balance sheet to $4 trillion is something that I don’t think anybody expected going in. So I happen to 

agree with Mr. Taylor that we may want to push them more on 

what tools they decide to use to get to their goals. 

I yield back. Thank you. 

Mr. FITZPATRICK. The gentleman’s time has expired. 

The Chair recognizes the gentlelady from Ohio, Mrs. Beatty, for 

5 minutes. 

Mrs. BEATTY. Thank you, Mr. Chairman. 

And thank you to our ranking member. 

I also thank our witnesses for being here today. 

I believe as I was coming in, Mr. Kupiec, I heard you talking 

about employment and price stability. While certainly, as we know, 

the United States economy continues to recover, it is important for 

us to understand the Federal Reserve’s dual mandate to achieve 

maximum employment and price stability, as well as to understand 

that Congress continues to have oversight of the Fed, but to allow 

the Fed’s monetary policy independence to achieve what I am going 

to refer to as these ‘‘twin goals.’’ 

So, I would like to discuss the Fed’s role in bank supervision. I 

think the Federal Reserve’s Governor stated: The most important 

contribution we can make to the global financial system is to ensure the stability of the United States’ financial system. So when 

we think of that, when we think of the $50 billion asset threshold, 

which I am on the record as saying that I think it should be higher, 

and while we talk about how a $100 billion asset threshold might 

make more sense, I don’t know that I agree with a threshold alone 

being enough to warrant how we treat the banks and how we label 

them. 

My question for the panel is, was Dodd-Frank’s Section 165, enhanced supervision, supposed to apply to firms that lack systemic 

importance to the stability of the United States financial system? 

And if not, what are those domestic effects on having regulators 

apply enhanced supervision to such institutions? 

Mr. KUPIEC. Thank you. 

Section 165, if you read it, and I am sure you have, it is about 

financial stability. The enhanced prudential standards are standards that are supposed to be imposed because the firms they are 

imposed on, if they were to get into financial distress, could cause 

a crisis. They could cause financial markets to lock up, to dysfunction. And so the whole idea that a $50 billion dollar institution 

could bring the U.S. financial markets to its knees, I think is crazy. 

The $50 billion threshold is way too low. 

Last week, I testified in Chairman Neugebauer’s subcommittee, 

the Subcommittee on Financial Institutions and Consumer Credit, 

on a more appropriate way to designate institutions, and this is 

going back to the modification of Congressman Luetkemeyer and 

his colleagues’ bill where the FSOC would consider designations. 

But to differ from Congressman Luetkemeyer’s bill, the whole financial systemic risk debate has moved to designating subsidiaries 

20 

as critical for the financial system. So if you look at the resolution 

policies that now are being promoted internationally and domestically by the FDIC, they say what you really have to do to maintain 

financial stability is if a firm gets into trouble, you have to keep 

the subsidiaries open and operating to prevent financial systemic 

risk. 

And so what I would argue is, you would look at the subsidiaries 

and designate subsidiaries as being the systemically important subsidiaries, and that would take away the whole threshold. So you 

could be a large firm, but you could be well-diversified and have 

a number of small subsidiaries and none of them might be critical 

for the function of the financial market. 

So I think it really is the way the resolution ideas are moving, 

and it would mandate legislative changes to Section 165 of the 

Dodd-Frank Act in how we designated firms. 

Mrs. BEATTY. Okay. In my last few seconds, certainly you know 

by law that the Federal Reserve conducts monetary policy to 

achieve maximum employment, stable prices, and moderate longterm interest rates. 

Dr. Rivlin, would you please discuss, to the best of your knowledge, what effects Federal monetary policy has, if any, on employment and perhaps through sustained low interest rates on wage 

growth? 

Ms. RIVLIN. The Fed has several ways of affecting the level of activity in the economy. The most obvious one is control of short-term 

interest rates. And in an economy that is operating below its potential, and recently we have been way below our potential, it can 

stimulate some investment and activity by keeping rates low. 

During the recent years, they also realized they needed to keep 

long-term rates low, and that was the reason for the bond buying 

quantitative easing. 

These are fairly blunt instruments, but they use them as well as 

they can, and I think by and large, they are doing a pretty good 

job. 

Mr. FITZPATRICK. The gentlelady’s time has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren, for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

And thank you all for being here. I appreciate your work and 

your words today. 

I want to spend just a couple of minutes, and address this to Dr. 

Kupiec, if I could, talking just a little bit more, and I think at the 

opening statements of the hearing today, we certainly heard a difference of opinion of the role of Congress in oversight of the Fed 

and whether that should happen or not, or whether the Fed should 

be completely independent. 

And I see, again, following up on Chairman Duffy’s questioning 

a little bit about the 2012 FOMC leak, it really raises concerns for 

me and others, but also failure to disclose that to Congress, raises 

additional concerns as well. 

I wonder if you would talk just briefly about the benefits of proper oversight that happen in the marketplace as we are truly doing 

our job as a Congress to oversee the Fed, but also negative effects 

if we fail to do our job. 

21 

Dr. Kupiec? 

Mr. KUPIEC. Congressional oversight is very important. The way 

the system is working now, the Federal Reserve has been given 

enormous discretion to craft policies. And these policies, the ones 

that are being crafted internationally, take a number of years to 

put in place, and Congress may not revisit them till the end, when 

all the work is done. And as I say, these things are very much put 

together like treaties, and it becomes very difficult for the Congress 

to intervene and to change a process or stop a process if it is not 

in the direction that was originally intended in the law. 

Mr. HULTGREN. So it is important to be part of the process 

throughout and not jump in just at the end? 

Mr. KUPIEC. That is what I elect you for, yes. 

Mr. HULTGREN. Yes. I am going to shift and talk a little bit about 

some other questions I have. 

Dr. Taylor, if I can address some questions to you. And really 

looking at these last 6 years, I would say, have been defined by the 

Federal Reserve’s exceptionally interventionist and discretionary 

monetary policy. I would say thus far this monetary experiment 

has not produced desired results, but has created enormous 

amounts of uncertainty about the future. 

As we are moving forward and we see the Fed has ended its 

quantitative easing program and is beginning to think about raising interest rates, which we think might happen soon, are we approaching a point where a rules-based approach to setting interest 

rates, an approach you have supported in the past, would again be 

useful? And if we do see that type of approach, what type of transparency would also come along with that? 

Mr. TAYLOR. I certainly think we have come to the point where 

such a process would be useful. I actually think it would have been 

useful a little earlier, to be sure. 

Mr. HULTGREN. Me, too. 

Mr. TAYLOR. Just to elaborate, I think the Fed’s actions in the 

panic, lender-of-last-resort actions, have done a lot of good, it was 

basically hard to disagree with that, details of course. But before 

that, I think what Mr. Calabria mentioned, the rates being so low, 

which helped induce some of the excesses, that was really not according to the rules that worked in the 1980s and 1990s. And then 

subsequently to that, the unconventional policies, et cetera, I think, 

were not effective. 

So the sooner, the better, in terms of getting back to the things 

that worked, is the way I would put it, the things that worked in 

the past, we would be better off doing that. 

Mr. HULTGREN. What can we do to help push that? What do you 

think our role ought to be in that? 

Mr. TAYLOR. I think the best thing is to ask the Fed to describe 

their strategy, then there can be a discussion about it. Without 

going much further, I agree with the sentiments that this committee, and the Congress cannot micromanage the Fed, and 

shouldn’t be doing monetary policy. But it can ask the Fed to describe what its policy is, what its strategy is. It can even say: 

Change it, if you want, but tell us why. It seems to me that is part 

of the oversight, part of the accountability, and I think that is what 

the Congress could do. 

22 

Mr. HULTGREN. I think that is a good balance. And it doesn’t 

have to be either/or, either we are completely involved or completely hands off, but, again, recognize that we do have a role 

there. 

Dr. Calabria, do you have any thoughts on that? Do you agree 

with Dr. Taylor on this? Are there other suggestions you would 

have for us? 

Mr. CALABRIA. Absolutely. I think the oversight role is incredibly 

important. And I say this as a former staffer of the Senate Banking 

Committee. I wish we had done more oversight of the Fed before 

the crisis, and I think some of this would have been avoided. 

It is certainly worth remembering, in talking about the importance of an independent Fed, that the Constitution delegates that 

authority from Congress. And so it is more likely often than not the 

Executive Branch which will have incentives for short-term goosing 

of the economy, if you will. As you know from being up here, the 

notion that Congress will have one single viewpoint on monetary 

policy is simply not going to be the case. 

So I do think it is important for Congress to serve as an important counterweight to the Executive Branch, which has much more 

clearly defined incentives in terms of monetary policy. 

Mr. HULTGREN. Great point. 

Thank you all again. 

My time has expired. I yield back, Mr. Chairman. Thank you. 

Mr. FITZPATRICK. The Chair now recognizes the gentleman from 

Maine, Mr. Poliquin, for 5 minutes. 

Mr. POLIQUIN. Thank you, Mr. Chairman. 

And I thank the witnesses for being here today. I appreciate it 

very much. 

With Chair Yellen coming in tomorrow for her regular testimony, 

I think it is a great time for us to dig into a little bit about the 

accountability that the Fed has with respect to regulating our economy and financial markets. 

Every day I talk to business owners in our district up in Maine 

who are encumbered with mountains and mountains of regulations 

that are preventing them from growing and hiring more people. In 

fact, they spend more time trying to comply with Federal regulation and more of a cost than they do in selling more of their products. 

So I am very concerned about this. I believe there does have to 

be a balance between fair regulations, predictable regulations, but 

also not killing jobs. 

Now, one of the concerns that I have with the Fed is they continue to push back on wanting their independence, and they should 

be independent, of course; I think we all agree with that. However, 

they have also to date failed to comply with subpoenas that have 

been issued by Congress through this committee. 

And so I am a little bit concerned about that. When you look at 

some of the information that was disclosed in 2012, in a confidential deliberation at the Fed disclosed to one party, such that that 

Wall Street participant gave special consideration to their clients 

in violation of the law. And also it put other investors around this 

country, millions of investors saving for their retirement who were 

not subject to or didn’t have access to that same information. So 

23 

I am very concerned about that, and I want to be on record about 

that going forward. 

That being said, I would now like to turn my attention to a 

slightly different topic. Mr. Kupiec, if you don’t mind, I know in the 

past you have expressed concern about the living will process 

under the Dodd-Frank set of guidelines or set of regulations. And 

I believe you are even more concerned that process could be a hindrance to capital formation and growth and what have you in the 

non-bank financial institution space, specifically with the insurance 

companies and with asset managers, mutual funds, and pension 

fund managers. 

Now, when you have insurance companies that are already regulated by 50 State regulators and you have investment managers 

who run $24 trillion of retirement savings across this country already regulated by the SEC, now the Fed wants to get involved. 

Could you dig into this a little bit, sir, and tell us what that might 

look like? And do you believe that the Fed has any experience in 

this area? 

Mr. KUPIEC. Thank you for the question. 

The whole issue about whether asset managers and large insurers are systemically important institutions is a sticky one. AIG, of 

course, needed assistance during the crisis, but that really—the 

problems at AIG were not inherently from the insurance company 

parts of it. The insurance companies were completely fine. It was 

with a derivatives company that was in London, and it was under 

the Office of Thrift Supervision oversight and just not done very 

well. 

But that carried over. That carried over to the insurance companies after the crisis, and it really isn’t warranted. Asset managers—the more we tighten down on banks and bank regulation 

and we keep people from making—the longer we keep zero-interest-rate policies, that you and I put money in the bank and we earn 

nothing on it, the more we force investors who need to earn a return on their money to go to securities markets, to go to mutual 

funds. And so the growth is really in the mutual fund industry. 

The harder the Fed and banking regulators squeeze the banks, 

the more the money flows out, which is quite a natural reaction in 

markets. But, of course, the regulators want to get ahold of that 

because the horse is leaving the barn. The game for them is over. 

And so what they really want to do, and one of the problems is, 

is to impose bank-like regulation on asset managers, mutual funds, 

things like treating money market mutual funds as if they are an 

insured bank account. They argue, well, we have to— 

Mr. POLIQUIN. But if I may, Dr. Kupiec, if you have a couple of 

asset management firms, those assets are not on the balance sheet 

of those firms. That is someone else’s money that they are managing. So there is no systemic risk to the market, because if there 

is a problem, the money just goes to another asset manager and 

the actual securities are held in a trust department down the road. 

Mr. KUPIEC. You are absolutely right. There is no leverage. The 

people who own the mutual funds own the assets. They take the 

losses. There is no safety net subsidy. There is no reason for systemic risk problem here, in my opinion. 

24 

Mr. POLIQUIN. Thank you very much, Dr. Kupiec, for clearing 

that up for all of us. I appreciate it. 

Mr. Chairman, I yield back my time. Thank you. 

Mr. FITZPATRICK. The gentleman from Arkansas, Mr. Hill, is recognized for 5 minutes. 

Mr. HILL. Thank you, Mr. Chairman. I thank the ranking member as well, and I thank this distinguished panel for being with us 

today. 

I wanted to go back and talk about Section 13(3) authority, and 

get your views on that subject. We had crashes and depressions for 

100 years before the Fed was formed in 1913, and we have certainly had some doozies since 1913. And I would like the panel’s 

views on the Fed’s use of 13(3), the Bagehot Rule, to go back to 

Lombard Street, ancient days; and also your thoughts on whether 

such power should be somehow limited to just depository institutions rather than the economy as a whole. 

I will start with you, Dr. Calabria. 

Mr. CALABRIA. Let me peel away the onion of that question. 

First, let me start with the nonbankers versus bank latter part 

of it. So certainly 13(3), in my opinion, is largely for nonbanks, because banks should be able to go to the discount window or other 

lending functions. So if we want to have nonbanks to have access 

to some sort of Fed assistance, that is largely going to be 13(3). 

My druthers would be not to have that authority at all. If you 

are going to have that authority, I do think that authority needs 

to be limited to firms that are indeed solvent and should be broadly 

available. I will take this as a moment to say the approach that 

Senators Warren and Vitter have suggested in the Senate, I think, 

is a wise approach in the step to try to at least add some actual 

flesh to what Dodd-Frank tries to do in terms of limiting 13(3). 

But, again, let me end with saying, if I had my choice, we wouldn’t 

have those authorities to begin with. 

Mr HILL. Dr. Kupiec? 

Mr. KUPIEC. Banks are special, and we have central banks in 

part to be able to provide lender-of-last-resort authority to depository institutions when they need it, provided they are solvent, and 

I think those powers are necessary. Whether the Federal Reserve 

should have special powers outside of that to other financial firms, 

I think that has to be limited, much more limited. 

Right now, the rules in Dodd-Frank, some would argue that they 

are too restrictive on the Fed. I think the Fed argues that. But 

many think that the rules are written in a way—one of the rules 

is they have to—if they are going to have a special lending facility, 

it has to be a facility tailored for the whole industry to use. But 

you could easily tailor a facility that only one firm decided to use, 

and so there is always a way around the rules. And so many believe these 13(3) rules are not restrictive enough. 

I think this issue does need to be revisited, and the Congress 

should make a decision about how far it wants the Fed to have 

these special lending powers. I think they are an issue. 

Mr. HILL. Dr. Taylor? 

Mr. TAYLOR. I think it certainly should be limited, to answer 

your question. My preference would be to limit it to depository institutions, obviously solvent ones. And this comes to the rules that 

25 

you implement and what the collateral should be, what the penalty 

rate should be. I think the Fed should stipulate what that should 

be as best as it can, and I would be on the side of limiting it more 

than others. 

Mr. HILL. Dr. Rivlin? 

Ms. RIVLIN. One of the main things we learned from the 2008 crisis is that systemic risk can come from every direction. In 2008, it 

came primarily from nondepository institutions, although it came 

from all of them. I believe the Fed needed the powers once we were 

in that situation, which we never should have been, to lend to nondepository institutions as quickly as possible. The rules need to be 

reconsidered, but I would not make them along those lines. 

Mr. HILL. Thank you. 

Let’s shift gears, Dr. Kupiec, to the issue you brought up in your 

testimony about the directives from the FSB. And tell me the statute that our regulators implement without discussion, FSB directives. What is the statute in the United States that permits them 

to do what they are told by the FSB. 

Mr. KUPIEC. There is no statute. 

Mr. HILL. How do they do that then? 

Mr. KUPIEC. It is a mystery. 

Mr. HILL. Can you explain the mystery, please, in 9 seconds? 

Mr. KUPIEC. The President and the Secretary of the Treasury 

met in G-20 discussions on or about 2011 and created this international group called the Financial Stability Board that was supposed to make the world safe for all financial markets forevermore. 

And so they take it as a directive, I think, more from the Executive 

Branch that the rules crafted in the FSB—somehow they are empowered to put those rules in place in the United States. 

Mr. HILL. Thank you. 

I yield back, Mr. Chairman. 

Mr. FITZPATRICK. The Chair now recognizes the gentleman from 

Colorado, Mr. Tipton, for 5 minutes. 

Mr. TIPTON. Thank you, Mr. Chairman. 

I would like to thank our panel as well for being here. 

Dr. Kupiec, I appreciated your words when you were talking 

about uncertainty in the marketplace and a need for clarity. But 

I think there is a lot of concern when we are talking about transparency and accountability as we continue to see the Federal Government, through a variety of different organizations, continue to 

extend its footprint in terms of regulatory authority. And I think 

we can make a very credible argument that if we are not having 

inflation, we are having taxation via regulation, because ultimately 

these costs are being passed on to the American consumer, driving 

up costs. 

But what I would like to be able to maybe focus on and get your 

comments on is we have now a lot of our entities that are looking 

to be able to get out from under the designation of being a SIFI. 

We have General Electric right now trying to be able to sell off 

some of its assets simply to get out from under the designation and 

the onerous provisions that are going to be inhibiting their ability, 

and increasing costs for consumers, by the way. 

Would you like to maybe speak a little bit about that uncertainty, that lack of clarity that we are seeing out of that designaVerDate Nov 24 2008 11:57 Mar 18, 2016 Jkt 097153 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\97153.TXT TERI
26 

tion process? Is it, to quote your words from just a moment ago, 

just a great mystery, a guessing game that we are having to play? 

Mr. KUPIEC. The designation as systemically important under 

Section 165 of the Dodd-Frank Act causes a lot of new rules and 

regulations. One of the most onerous ones is the CCAR stress test, 

the big stress test that the Federal Reserve Board does annually. 

And one of the reasons is because it is really a guessing game. 

There is no good model in which you can put in a macroeconomic 

scenario and accurately forecast how a financial institution is going 

to perform. That is a fictional story. 

The people in charge love it because it played well in 2009 with 

the stress test. But the fact of the matter is there isn’t a stress test 

anywhere on the globe that ever detected a crisis before it happened or even designated the firms that got into trouble when the 

crisis happened. There is just so much uncertainty, you can’t model 

it. 

And this gives rise to lots of problems when firms go in every 

year. They spend millions of dollars, hundreds of millions of dollars 

trying to model it. And their models now are more aimed at modeling how they think the Fed is going to model it rather than what 

actually happens. 

And these are totally fictional, hypothetical scenarios in which 

their management is forced to put huge effort and huge money on 

modeling a fictional event that never happens. And if they get a 

bad grade on that story by the Fed, they can’t pay a dividend, they 

can’t buy back a stock, they might not be able to merge with anybody or open up another line of business. 

So this is a very judgmental regulatory approach that really isn’t 

based in science at all, and I think it is very destructive. 

Mr. TIPTON. So we are modeling for the modeling without an instruction manual? 

Mr. KUPIEC. Yes. And we have built a huge industry to support 

the modeling of the model. 

Mr. TIPTON. I believe you are right on that. We just had Secretary Lew before this committee and he refused to answer and 

give any kind of real information in terms of what information is 

going to be required for that designation for companies to actually 

be able to respond to. 

I would like to be able to follow up maybe with Dr. Calabria in 

regards to some of your comments in regards to just the composition under the Federal Reserve Act for designation on the Board. 

Why is that diversity important? 

Mr. CALABRIA. Because I think it is important to keep in mind 

that different parts of the country move at different paces. Texas 

is not California. Colorado is not Alabama. And so, I do think if you 

want a monetary policy that essentially tries to do the best to everybody in the country, you need to have that diversity in the 

Board. 

And I will certainly say as an aside, that the Fed should simply 

follow the law. The law says no more than two members from one 

district. It is actually pretty clear. And the fact that that has been 

flaunted regularly, to me, respect for the law has to start with the 

regulators or why would the regulated entities think that anything 

goes themselves. 

27 

But, again, the important part is so that you can get a variety 

of viewpoints so it is not simply Washington or New York that 

dominates the policymaking. 

Mr. TIPTON. And just a final question, for anyone who would like 

to speak on this; it is a real concern. I think our first obligation 

is to make sure that the economy of the United States is sound, 

that our economy is working for our people. And when I hear it is 

a mystery in regards to the FSOC and its response to the FSB, how 

concerned should we really be that we are having our policies driven by foreign entities as opposed to charting our own course? 

Mr. TAYLOR. You are addressing that generally? 

Mr. TIPTON. Yes. 

Mr. TAYLOR. One thing I would add to this, is that it is important to discuss and collaborate with other entities what is going on, 

with other governments, with other regulatory agencies. The Financial Stability Board began as something called the Financial 

Stability Forum. And I served on that. It basically had an advantage. You had representatives from the treasuries, the finance ministers, the central banks, and from some regulatory agencies, in our 

case, the SEC. So, those discussions were quite fruitful. 

I think there is a concern that actually policy is being made and 

that commits the United States in some way. So collaboration, if 

you like, or essentially discussion of what is going on in these 

groups with the Congress, I think is quite important. But the fact 

that they exist, I think is not the problem. 

Chairman DUFFY. The gentleman’s time has expired. 

The Chair now recognizes the ranking member of the 

subcommitee, the gentleman from Texas, Mr. Green, for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. 

And I thank the witnesses again and apologize for having to step 

away for a moment. 

I would like to go to Ms. Rivlin. 

Ms. Rivlin, on page 3 of your testimony you indicate that the 

campaign to audit the Fed is a misleading misnomer. And I would 

like for you to elaborate on this if you would. You go on to indicate, 

to say that it is nonsense, and that the Fed is audited. Would you 

kindly elaborate? 

Ms. RIVLIN. Yes. I think the idea that the Fed is not audited is 

inherent in the title of the campaign to audit the Fed, and it makes 

people think maybe they don’t have auditors in there the way ordinary financial institutions have to. And that is simply not true. The 

books of the Fed are carefully audited. They are audited by one of 

the Big Three, Big Four, whatever, auditing firms and by the GAO. 

So it is a misnomer and it is misleading. It is really a bill about 

second-guessing the Fed on monetary policy, giving authority to 

write a report about the deliberations on monetary policy. I think 

that is counterproductive. But in any case, it is not suggested by 

the title, ‘‘Audit the Fed.’’ 

Mr. GREEN. Thank you. 

Moving to another part of your testimony, you indicate that, in 

your opinion, the greatest, biggest—and that is the way I am reading it—in your opinion, the greatest, biggest danger to our long-run 

economic health is political gridlock. Would you elaborate on this, 

please? 

28 

Ms. RIVLIN. I do, and I think particularly the budgetary gridlock. 

I happen to be one who thinks that we should invest heavily, publicly and privately, in the growth of our economy. That is going to 

mean infrastructure. It is a scandal if we can’t get an infrastructure bill passed when it is bipartisanly supported in the Congress. 

I believe it means investment in science and investment in skills. 

But all of those things cost money and would add to the debt. So 

we have to pair that set of investments with longer-run control of 

the rise of entitlements and tax reform that will give us both a fairer, more pro-growth tax systems, and more revenues. 

Mr. GREEN. And, finally, on the last page, your last four words 

are, ‘‘Leave well enough alone.’’ Would you care to elaborate? Perhaps you have already covered it, but it might serve us well to hear 

you explain. 

Ms. RIVLIN. I was referring there to the conduct of monetary policy. It is clear, and it has been clear on this panel that there are 

different views about monetary policy. But I think the Fed is being 

very transparent about what it is doing and what dilemmas it 

faces, genuine dilemmas, on what to do next on monetary policy, 

and I would not interfere with the deliberations on monetary policy. That would be my advice to the Congress. 

Mr. GREEN. Thank you very much, Mr. Chairman. I yield back. 

Chairman DUFFY. The gentleman yields back. 

The Chair now recognizes the gentlelady from Utah, Mrs. Love, 

for 5 minutes. 

Mrs. LOVE. Thank you very much. 

Thank you for being here. 

Ms. Rivlin, you have spent part of your distinguished career as 

a Vice Chair of the Federal Reserve Board, so I want to avail myself and the committee of the value of your experience. 

As you know, the Federal Reserve has come a long way, I agree 

with you, in the past 2 decades in improving transparency regarding monetary policy. The three ways that I have seen are: the Federal Open Market Committee publishing its decisions following policy meetings, adding to its statement the votes of individual members; issuing forward-looking guidance; and more recently, the Fed 

Chair conducting press conferences after every FOMC meeting. 

Meanwhile, my biggest concern is that there hasn’t been similar 

progress improving the transparency of the Fed’s regulatory policies. In fact, some would argue that the Fed has become more 

opaque, more secretive with regards to its regulatory policy. Do you 

agree with that? And if so, how would you explain the Fed’s reluctance to achieve similar transparency on the regulation side? 

Ms. RIVLIN. I think Dodd-Frank is a work in progress. Everybody 

is trying to figure out how to make it work. The Fed’s primary responsibility is rightly, in my opinion, to focus on systemic risk and 

how to avoid another 2008 where we did the wrong things for quite 

a long time and then were suddenly faced with this crisis. But 

some of the things we have talked about here are judgment calls, 

how big does an institution have to be to be systemically important? 

Mrs. LOVE. Okay. So I can actually identify three major problems 

with the Fed’s lack of transparency regarding its regulatory powers. The first is confusion: Regulatory institutions don’t know the 

29 

standards by which they are being evaluated. We have heard most 

recently from small banks regarding the implementation of the 

Volcker rule, Basel III requirements, and from larger banks with 

regard to the stress test and recently submitting living wills or 

plans by which large banks can be dismantled in the event of failure. 

The second I have seen is that confusion among the banks can 

undermine safety and soundness, defeating the whole purpose of 

regulation in the first place. 

And third, a lack of transparency that undermines our ability in 

Congress to perform our oversight duties. We can’t see what is 

going on. We can’t actually offer any thoughts or help on that. 

Do you agree with any of those identified problems? And can you 

tell us if this is something that we can improve upon? 

Ms. RIVLIN. I agree with many of the problems. This is part of 

what I meant by saying Dodd-Frank is a work in progress, that we 

are trying to figure out how to do it right. 

With reference to the discussion that we had earlier about stress 

tests, there are no perfect stress tests, but they do serve a useful 

purpose. I think within the financial institution, if they know they 

are going to have to answer a lot of what-if questions, they are 

going to worry about it a lot more. 

So I think we just have to keep working on those. I am not sure 

how the Congress can help. That is a very good question. You can 

keep asking questions. But I think that is about the limit of what 

you can do. 

Mrs. LOVE. I wasn’t going to bring this up, but I use things in 

analogies all the time. I think that is the best way to get a point 

across. As a parent, I have dealt with sick kids. Whenever they 

have a fever, we want to make sure that we help out as much as 

possible, so we would give them a dosage of Tylenol. 

There isn’t anyone here who would argue that we had a problem 

that we needed to fix. But sometimes when you give too much of 

a medicine, you actually end up doing the opposite. In other words, 

if you give the child too much Tylenol, they can go into a coma. 

And there are times where I look and see what we are doing and 

how much it is actually putting our economy into a coma, what we 

are doing to actually help the economy. There are times where our 

regulatory agencies have actually done the opposite in terms of creating banks, creating such large regulatory burdens that we have 

created big banks, which is what we have tried to avoid in the first 

place. 

So, again, we have to make sure that we have the right type of 

dose. And that is why Congress is here to help, because it is a balance. 

Ms. RIVLIN. I think that is right. And I think in the wake of a 

huge financial crisis, there is going to be a tendency to overregulate. And that is probably a price worth paying for a while, but we 

have to be very careful not to overregulate. 

Mrs. LOVE. Certainly not at the expense of putting our economy 

into a downward spiral. 

Chairman DUFFY. The gentlelady’s time has expired. 

Mrs. LOVE. Thank you. 

30 

Chairman DUFFY. The Chair now recognizes the gentleman from 

Texas, the chairman of the full Financial Services Committee, Mr. 

Hensarling, for 5 minutes. 

Chairman HENSARLING. Thank you, Mr. Chairman. And thank 

you for calling this hearing with this outstanding panel. And I 

don’t often use that phrase. 

I am very happy that you all have agreed to testify here. I am 

sorry more Members, particularly on the Minority side, did not 

take advantage of the hearing. 

Typically, I don’t choose to speak at subcommittee hearings, 

wanting other Members to have their opportunities. But given that 

there are no other Members in the queue, I just wanted to explore 

in a little bit more depth the concept of Fed independence vis-a-vis 

the Fed reform bill that was passed in this committee in the last 

Congress. And I think the Audit the Fed provision, which has, 

frankly, been kicking around for several Congresses, was brought 

up as well. 

And I guess I am trying to figure out exactly how asking the Fed, 

I guess to use your term, Dr. Taylor, to reveal their strategy on top 

of their goals is somehow interfering with their independence, if 

they get to set the monetary policy rule convention strategy, if they 

get to change it, deviate from it; they just have to come and testify 

in public about it. 

Do you have any concerns about that legislative provision somehow interfering with the independence of the Fed in the conduct 

of monetary policy, separate and apart from every other new responsibility Dodd-Frank has now added to their plate? 

Mr. TAYLOR. No, I don’t have a concern about that. I think it is, 

in a sense, my experience in government, it is the other way 

around. If you have a clearly enunciated set of principles or procedures, then that reduces the chance of giving in to somebody who 

is asking you to do something special, whether it is outside of government or inside of government. I think it is very, very important. 

I think also the history of the ebbs and flows of Fed independence, de facto independence, frequently is related to the Administration, not the Congress. So it seems to me there shouldn’t be a 

concern about independence as that legislation is currently constructed. 

Chairman HENSARLING. I think we all know that the Governors 

on the Board of Governors have 14-year terms, and the Fed has an 

independent funding stream. So I think, Dr. Rivlin, you used the 

phrase that the Audit the Fed would simply allow Congress to second-guess monetary policy decisions. I think I heard you say that. 

I guess I would question then, what is oversight? Does oversight 

interfere with the Fed’s independence? We certainly second-guessed 

the SEC, CFTC, and the CFPB. It is kind of our job around here 

in oversight. 

So are these particularly overly sensitive, thin-skinned people 

who serve on the FOMC? Or how does it interfere with their independence if the GAO is able to audit after the fact a monetary policy decision for people who have 14-year terms and an independent 

funding stream? 

Ms. RIVLIN. I haven’t actually understood exactly what this Audit 

the Fed bill wants the GAO to do. It is very obscure. But I think 

31 

it is to write a report on what deliberations the Fed went through 

and how they made monetary policy. And I don’t think you learn 

anything very interesting from that. The Fed doesn’t have— 

Chairman HENSARLING. But I guess, Dr. Rivlin, the question is, 

does it interfere with their independence? 

Ms. RIVLIN. I think that having another group of people in there 

writing a report about how these deliberations unfolded and what 

they did is likely to become quite political, and I think it is unnecessary and not a good idea. 

Chairman HENSARLING. I’m sorry. But in the remaining time, Dr. 

Calabria? 

Mr. CALABRIA. I don’t see it as interfering with their independence. And certainly we don’t see that in terms of GAO audits of the 

SEC or the CFTC, or these other agencies; they don’t sit around 

and look at every word. As a former Banking Committee staffer, 

I would certainly say, to me one of the hard parts of the job was 

to help Members of Congress understand how programs worked. 

And so one of the real values of GAO is to explain to Congress how 

government programs work. 

Chairman HENSARLING. Quickly, Dr. Kupiec, same subject? 

Mr. KUPIEC. No, I can’t. I think having to explain your policies 

to an independent agency who writes a report focuses the mind. So 

I can’t see how it would affect their independence in any way. 

Chairman HENSARLING. Quickly, Dr. Taylor, in the time that I 

no longer have. 

Mr. TAYLOR. I guess I have to agree with my two colleagues. 

Chairman HENSARLING. Thank you, Mr. Chairman. 

Chairman DUFFY. The gentleman yields back. 

I would like to thank our witnesses again for your testimony 

today. This was an informative and enlightening hearing. Thank 

you. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

Without objection, the hearing is now adjourned. 

[Whereupon, at 11:45 a.m., the hearing was adjourned.] 

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A P P E N D I X 

July 14, 2015 

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