```

[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]

                  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
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
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

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
              Subcommittee on Oversight and Investigations

                   SEAN P. DUFFY, Wisconsin, Chairman

MICHAEL G. FITZPATRICK,              AL GREEN, Texas, Ranking Member
    Pennsylvania, Vice Chairman      MICHAEL E. CAPUANO, Massachusetts
PETER T. KING, New York              EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina   KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee       JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina        DENNY HECK, Washington
RANDY HULTGREN, Illinois             KYRSTEN SINEMA, Arizona
ANN WAGNER, Missouri                 JUAN VARGAS, California
SCOTT TIPTON, Colorado
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas

                            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
 
                  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.
    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 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 financial 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.
    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 Dodd-Frank 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 mortgage-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 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 
Dodd-Frank 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 one-third 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.
    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 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 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.]
    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 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 
second-guessing 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 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 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 monetary 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.
    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?
    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 perceive 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.
    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 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 
long-term 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.
    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.
    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 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.
    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 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 designation 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.
    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?
    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 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.
    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 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.]

                            A P P E N D I X

                             July 14, 2015
                             
                             
                             
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