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	<title> - CAN MONETARY POLICY REALLY CREATE JOBS?</title>
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	[House Hearing, 112 Congress]
	[From the U.S. Government Publishing Office]




	CAN MONETARY POLICY REALLY CREATE JOBS?
	=======================================================================

	HEARING

	BEFORE THE

	SUBCOMMITTEE ON

	DOMESTIC MONETARY POLICY

	AND TECHNOLOGY

	OF THE

	COMMITTEE ON FINANCIAL SERVICES

	U.S. HOUSE OF REPRESENTATIVES

	ONE HUNDRED TWELFTH CONGRESS

	FIRST SESSION

	__________

	FEBRUARY 9, 2011

	__________

	Printed for the use of the Committee on Financial Services

	Serial No. 112-3



	[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]



	U.S. GOVERNMENT PRINTING OFFICE
	64-552 PDF WASHINGTON: 2011
	____________________________________________________________________________
	For sale by the Superintendent of Documents, U.S. Government Printing Office,
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	HOUSE COMMITTEE ON FINANCIAL SERVICES

	SPENCER BACHUS, Alabama, Chairman

	JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
	Chairman Ranking Member
	PETER T. KING, New York MAXINE WATERS, California
	EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
	FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
	RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
	DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
	WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
	JUDY BIGGERT, Illinois BRAD SHERMAN, California
	GARY G. MILLER, California GREGORY W. MEEKS, New York
	SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
	SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
	RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
	PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
	JOHN CAMPBELL, California JOE BACA, California
	MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
	KENNY MARCHANT, Texas BRAD MILLER, North Carolina
	THADDEUS G. McCOTTER, Michigan DAVID SCOTT, Georgia
	KEVIN McCARTHY, California AL GREEN, Texas
	STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
	BILL POSEY, Florida GWEN MOORE, Wisconsin
	MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
	Pennsylvania ED PERLMUTTER, Colorado
	LYNN A. WESTMORELAND, Georgia JOE DONNELLY, Indiana
	BLAINE LUETKEMEYER, Missouri ANDRE CARSON, Indiana
	BILL HUIZENGA, Michigan JAMES A. HIMES, Connecticut
	SEAN P. DUFFY, Wisconsin GARY C. PETERS, Michigan
	NAN A. S. HAYWORTH, New York JOHN C. CARNEY, Jr., Delaware
	JAMES B. RENACCI, Ohio
	ROBERT HURT, Virginia
	ROBERT J. DOLD, Illinois
	DAVID SCHWEIKERT, Arizona
	MICHAEL G. GRIMM, New York
	FRANCISCO R. CANSECO, Texas
	STEVE STIVERS, Ohio

	Larry C. Lavender, Chief of Staff
	Subcommittee on Domestic Monetary Policy and Technology

	RON PAUL, Texas, Chairman

	WALTER B. JONES, North Carolina, WM. LACY CLAY, Missouri, Ranking
	Vice Chairman Member
	FRANK D. LUCAS, Oklahoma CAROLYN B. MALONEY, New York
	PATRICK T. McHENRY, North Carolina GREGORY W. MEEKS, New York
	BLAINE LUETKEMEYER, Missouri AL GREEN, Texas
	BILL HUIZENGA, Michigan EMANUEL CLEAVER, Missouri
	NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
	DAVID SCHWEIKERT, Arizona
	C O N T E N T S

	----------
	Page
	Hearing held on:
	February 9, 2011............................................. 1
	Appendix:
	February 9, 2011............................................. 43

	WITNESSES
	Wednesday, February 9, 2011

	Bivens, Josh, Ph.D., Macroeconomist, Economic Policy Institute,
	Washington, D.C................................................ 13
	DiLorenzo, Thomas J., Professor of Economics, Sellinger School of
	Business, Loyola University, Baltimore, Maryland............... 9
	Vedder, Richard K., Distinguished Professor of Economics, Ohio
	University..................................................... 11

	APPENDIX

	Prepared statements:
	Paul, Hon. Ron............................................... 44
	Bachus, Hon. Spencer......................................... 47
	Huizenga, Hon. Bill.......................................... 49
	Bivens, Josh................................................. 51
	DiLorenzo, Thomas J.......................................... 72
	Vedder, Richard K............................................ 77


	CAN MONETARY POLICY REALLY CREATE JOBS?

	----------


	Wednesday, February 9, 2011

	U.S. House of Representatives,
	Subcommittee on Domestic Monetary
	Policy and Technology,
	Committee on Financial Services,
	Washington, D.C.
	The subcommittee met, pursuant to notice, at 10:04 a.m., in
	room 2128, Rayburn House Office Building, Hon. Ron Paul
	[chairman of the subcommittee] presiding.
	Members present: Representatives Paul, Lucas, Luetkemeyer,
	Huizenga, Hayworth, Schweikert; Clay, Maloney, and Green.
	Ex officio present: Representative Frank.
	Also present: Representative Renacci.
	Chairman Paul. This hearing will come to order.
	I want to welcome everybody today, our guests as well as
	our Members.
	And I think we will go ahead and introduce our Members now,
	and those who aren't here, we can do it later on.
	Before I introduce our side, the members on this side, I do
	want to ask unanimous consent for a statement to be inserted
	into the record from Spencer Bachus. He is not here today. He
	would have liked to have attended, but he had to attend a
	funeral.
	Also, I would like to just mention those individuals who
	are here.
	First, we have Congressman Lucas from Oklahoma. He is an
	old hand at this. And I think sitting next to him is Blaine
	Luetkemeyer from Missouri.
	Welcome.
	And I think we have a guest who is not a member of the
	subcommittee, and that is Jim Renacci from Ohio.
	As others come in, we can recognize them.
	I will defer at the moment here to the ranking member to
	introduce his Members who are here.
	Mr. Clay. Thank you, Mr. Chairman.
	First, let me congratulate you on your election as chairman
	of the subcommittee. And I look forward to working with you in
	the 112th Congress.
	Joining us today is the overall ranking member of the
	Financial Services Committee, the gentleman from Massachusetts,
	Mr. Barney Frank. And I want to thank him for being here today.
	Also with us is a fellow Texan of yours, Mr. Al Green, who
	represents the City of Houston. And thank you for being here.
	And, of course, I am William Lacy Clay of Missouri.
	Chairman Paul. Thank you very much.
	I do want to also welcome the Congressman and ranking
	member from Massachusetts. We have worked in the past on many
	of these issues, to the surprise of some people at times. But I
	am glad he is attending today.
	Mr. Frank. Thank you, Mr. Chairman. I would add, to the
	surprise and occasional dismay of other people.
	Chairman Paul. But the reason I said kind words is I expect
	him to behave today. That is all.
	I would like to ask unanimous consent that all the
	statements of any member can be admitted into the record. If
	there is no objection, they will be admitted.
	Oh, and I do need to ask unanimous consent for Jim Renacci
	to sit with us today.
	No objection is heard.
	I would like to go ahead and start with an opening
	statement, and then I will defer to the other Members who care
	to make statements, as well.
	Today, we are talking mainly about unemployment. And, to
	me, this is a very significant issue that we all care about. I
	have not yet met anybody in the Congress or anywhere who thinks
	we shouldn't do something about it, so it is unanimous.
	Unemployment is too high, and the goal is to keep unemployment
	low and employment high. And this would make everybody happy.
	But the disagreement seems to come from trying to
	understand how we got unemployment and what we should do about
	it. And I have argued that if you don't know exactly why we
	have unemployment, it is very hard to come up with a solution.
	That is the purpose of these hearings, at least initially,
	to try to understand the ramifications and especially the
	connection of unemployment to monetary policy. Because people
	are thinking more about the Federal Reserve policy today than
	ever before. And everybody does have opinions. Some people
	think there is too much easy money and credit and interest
	rates are too low, and others complain on the other side and
	say that we need more of it, we need more expansion of credit
	and we need more spending.
	So that is where the disagreements are. But I think there
	should be a lot of goodwill here in the goal of finding out
	just what causes our problems and what we can agree on and what
	we can do about it.
	Between 2001 and 2010, we had a population growth of 26
	million people. Yet, at the end of that decade, we had 2.3
	million less people employed. So these numbers aren't very
	encouraging. It is terrible that there are 2.3 million people
	not employed, but I think it might even underestimate the
	problem since we had such a big population growth.
	Just in the last 3 years, or between 2007 and 2010, we had
	7 million jobs lost. I do know that we have had some increase
	in jobs in the last year, but we are still way behind the
	curve.
	But even with the job increase, we here in Washington, the
	combination of the Fed and what the Congress has done, we
	probably have pumped in $4 trillion. And if you look at the new
	jobs we have created, I would say they are very, very expensive
	jobs. I imagine we could have given everybody $60,000 or
	$70,000, maybe $100,000--I haven't done the calculation--just
	given them the money and they would have been better off. And
	that, of course, would have satisfied the people who say we
	have to stimulate spending; the money would be there. But,
	instead, the money went in different places, and the
	unemployment rates haven't dropped.
	Another problem I see when we deal with the unemployment is
	sometimes we get confused on how we measure it. The lead figure
	from the Bureau of Labor Statistics comes up every month, and
	they tell us that unemployment is 9 percent. And, oh, it is
	down from 9.5 down to 9; there is a great recovery going on.
	But the people don't feel that way. The unemployment rate is
	still very high.
	And if you look to some of the private sources of measuring
	unemployment, you find out that unemployment may well be much
	higher. Even the government statistics reveal that if you count
	all the people who are just partially employed or working part-
	time on weekends, that number can jump to 16 or 17 percent. But
	then if you include all those individuals who have given up
	looking for work, there are some who report that the
	unemployment rate could be 22 or 23 percent, reaching almost
	the height of the Depression.
	So I would encourage all of us to think more seriously
	about how we measure unemployment, and if this is a real
	problem, that we ought to do something about defining how to
	measure unemployment.
	I think in this discussion today, certainly we will be
	thinking about the results, the inefficiency of the Federal
	Reserve, because they have had a mandate, and the Congress gave
	them a mandate, and the mandate is that we should have stable
	prices and high employment. I can produce some statistics, and
	maybe later on will, to show that prices really aren't all that
	stable. And, certainly, unemployment reflects a failure. If
	that is their job, they didn't do a very good job. They haven't
	been very efficient in producing jobs.
	So these are the things we want to talk about and try to
	resolve and then see what needs to be done. Because, like I
	said, who wants high unemployment? Nobody wants high
	unemployment. We want to get people employed. I work from the
	assumption that there is a direct connection between monetary
	policy and the business cycle, and, therefore, we should pay
	more attention to it.
	Now I would like to yield to the ranking member, Mr. Clay.
	Mr. Clay. Thank you, Mr. Chairman.
	We were all privileged to witness President Obama's
	stirring State of the Union Address. And part of his uplifting
	message was an appeal for all of us to find common ground in
	order to move our Nation forward. That applies here at home and
	around the world, as well.
	But I am amazed that some of my colleagues in the Majority
	may have taken that concept a little bit too far. I never
	thought that I would see the day when allegedly conservative
	members of the Republican Party would side with the People's
	Republic of China over the best advice of the Chairman of the
	Federal Reserve. The Republican assertion that the Fed's
	actions to infuse the money supply in order to hold down
	interest rates and lower unemployment will somehow harm our
	currency is absolutely wrong.
	The congressional mandate for the Federal Reserve is really
	a two-sided coin. The Fed has a mission to both maintain stable
	prices and to foster conditions that promote job growth. If we
	expect this recovery to continue, we need to support both sides
	of that equation.
	As Chairman Bernanke has testified previously, this
	recession was unlike other post-war economic downturns. And I
	am thankful that the President, along with our congressional
	leadership and in coordination with the Federal Reserve, acted
	courageously to prevent a second Great Depression and to
	preserve the American middle class.
	Over the last 19 months, with the help of the Federal
	Reserve's wise monetary policy, corporate profits have soared,
	financial markets have stabilized and regained much of the
	value equities that was lost, and the private sector has
	created more than 1 million new jobs. And we still have a long
	way to go, but that is more new job creation than during the
	entire two terms of the Bush Administration.
	While we strive to restore our economic security, fear of
	future inflation is not today's most important problem. In
	fact, the core inflation rate is still near 1 percent. The real
	danger is if we impede the money supply; then deflation is next
	in the economic chain.
	We see real growth and recovery in almost every sector of
	the economy, in part because of the Fed's actions.
	Manufacturing is up, orders for durable goods are up, and car
	sales are better than expected, although too few, which is why
	we cannot let up now. There is no doubt that the Fed's prudent
	actions to carefully expand the money supply were appropriate,
	and they are helping put Americans back to work.
	I am not concerned about what the Chinese, the Brazilians,
	or the Europeans think about our monetary policy, especially
	when some of those who are complaining the loudest are guilty
	of manipulating their own currency to hamper American exports,
	which cost jobs here at home. The current monetary policy
	supports job creation here in America. Here in Congress, we
	have no higher priority.
	I thank you, and I yield back the balance of my time.
	Chairman Paul. I thank the gentleman.
	I would like now to yield to Congressman Luetkemeyer for
	his opening statement.
	Mr. Luetkemeyer. Thank you, Mr. Chairman. Thank you for
	holding the hearing. And I am pleased to serve on the
	subcommittee and glad to see that we are focusing on the most
	important issues facing our constituents: jobs.
	Since 1977, the Federal Reserve has been charged with two
	principal missions: controlling inflation; and maximizing
	employment. Despite recent attempts by the Fed, unemployment
	continues to hover at 9 percent for the 8th consecutive month,
	and the economy is still struggling, leaving one to wonder if
	the Fed is capable of affecting either or have they mismanaged
	the situation.
	Then there is the question of whether the Fed should remain
	to have a dual mandate. And that one has been continually
	debated since 1977. It is unclear whether this dual mandate
	does much of anything to promote job growth.
	Take, for example, Chairman Bernanke's quantitative easing
	plan. When first presented with the Fed's plan, Americans were
	told that this would be the vehicle to keep interest rates low
	in order to promote job growth and investment. By injecting
	hundreds of billions into the American financial system, the
	Fed sought to promote affordable business investment and
	economic recovery. This was a bold step, one that could
	ultimately our recovery by contributing to inflation. It is my
	hope that the $600 billion QE2 will promote lending and
	stimulate growth.
	At the same time, I am concerned that the Fed and other
	Federal regulators seem to be ignoring a key problem: excessive
	regulation along the lines of a lack of forbearance among
	examiners. As a former bank examiner, I believe the lack of
	responsible forbearance practiced by our regulators is
	imprudent. Time after time, I have heard from Missouri bankers
	who are troubled by increasing pressure from examiners to
	shrink their portfolios, even when the loans are performing.
	I fully support prudent financial regulatory oversight, but
	it is not in our best interest to promote economic policy that
	denies credit for viable projects and forces performing
	borrowers into insolvency.
	Sound monetary policy will play a role in restoring our
	Nation's economic stability. We need to energize the private
	sector and get the government out of the way by creating a
	regulatory environment that protects the American people while
	promoting economic expansion.
	With that, Mr. Chairman, I yield back. Thank you.
	Chairman Paul. I thank the gentleman.
	I would now like to yield to the ranking member of the full
	committee, Mr. Frank, for an opening statement.
	Mr. Frank. Thank you, Mr. Chairman.
	And I would begin by saying I agree with the comments just
	concluded. We have suffered from excessive rigidity on the part
	of the regulators. We have, on a bipartisan basis, over the
	past few years, the past year in particular, talked about the
	problem of mixed messages coming from Washington, of the top
	regulators saying they want to encourage lending but of our
	being told by bankers that they are encountering a great deal
	of excessive rigidity. And we will, I hope, continue to press
	for a reasonable approach on the part of the bank examiners.
	And we also have been engaged in conversations with the
	accounting board so that banks are not forced to take steps
	that are artificial and lock in a temporary problem, with a
	reduction in lending.
	But on the subject of today's hearing, I was, as the
	gentleman from Missouri was, surprised to see many of my
	Republican colleagues here and former members of Republican
	Administrations criticizing the Federal Reserve's quantitative
	easing partly because it was unfair to foreign countries. As
	the gentleman from Missouri pointed out, we had people
	explicitly agreeing with foreign critiques, saying that, among
	other things, what was wrong with what the Federal Reserve was
	doing was it was damaging the currencies of other countries.
	And as he noted, the People's Republic of China, in particular,
	was helping organize opposition to the Federal Reserve.
	Let's be very clear: Being accused of currency manipulation
	by the People's Republic of China is like getting a lecture on
	family planning from the Octomom. This is a country which has
	engaged in very serious and significant and systematic
	manipulation of its currency to our economic disadvantage.
	In fact, with regard to what the Federal Reserve has done,
	the negative predictions haven't come true. We have not seen
	inflation. We have not seen a great set of losses. We now know
	more about what the Federal Reserve is doing. And I know the
	gentleman from Texas does not think we went far enough in what
	we did last year in the bill, but we did make several steps
	that improved the transparency of what the Federal Reserve
	does. And under the law that we now have in place, no
	transaction between the Federal Reserve and any private entity
	will remain secret forever. There will be a publication of
	every transaction that the Federal Reserve does with any
	private entity, although, in some cases, with a time lag to
	prevent there from being market distortion.
	But to go back to this, yes, it is true that unemployment
	is still too high. But when you are dealing with economics, the
	question is not simply what the reality is but what the reality
	would have been in the absence of actions, what the economists
	call the ``counterfactual.'' And I think it is very clear that,
	as part of an overall approach, what the Federal Reserve has
	done has helped bring unemployment down below what it otherwise
	would have been, although not to a satisfactory level.
	But it is very clear that, with regard to the charge that
	it was going to lead to inflation, whether that was going to be
	very costly to the Federal Government, or that the Federal
	Reserve would be engaged in activities which it could not
	unwind, they have all been disproven by the facts. And we do
	have speculation--inflation may be coming later. But there has
	not been an inflationary problem. The problem continues to be
	the lack of employment to catch up with other aspects of growth
	in the economy.
	And I believe that Mr. Bernanke has been doing, with the
	overwhelming support of the other members of the Federal
	Reserve, including--remember, this is not just Mr. Bernanke.
	There have been a couple of dissents, but the Open Market
	Committee includes other appointees, and it includes Federal
	Reserve Bank presidents. They have most recently been unanimous
	on this. And I think that the effect has been a good one.
	And I hope that we will, as a bipartisan approach, tell the
	rest of the world that any suggestion that America should be
	constrained in what we do to stimulate jobs in this country
	will be unaffected by their concerns that it might have some
	impact on their own currencies, particularly those whose
	manipulation of their own currencies has been to our
	disadvantage.
	Chairman Paul. I thank the gentleman.
	Now, I would like to yield time for an opening statement to
	Mr. Lucas from Oklahoma.
	Mr. Lucas. Thank you, Mr. Chairman. And I appreciate the
	opportunity to offer an opening statement.
	I would simply observe, I think, that we all realize that
	the Fed's, in effect, running the printing presses perhaps is
	the best policy alternative they have there right now in this
	situation. But if you believe that price stability ultimately
	is what the economy needs to be rational and make decisions and
	grow for the long-term period, then you have to ask the
	question: By dramatically increasing the supply of money--yes,
	the volatility, the circulation of the currency, of money
	through the economy slowed dramatically, so that increased
	supply has been offset by the reduced activity has provided
	price stability or close to it.
	But if the Fed didn't see this mess coming in the
	beginning, will they see the inflation side in time also? If
	they didn't see this mess coming, will they see the inflation
	cycle starting up in time, the recovery in time to turn off the
	printing press, to shrink the supply, to offset the increased
	speed of circulation before we get into inflation? I am not
	sure, based on past history, that their vision in the future is
	going to be any better than it was in the past.
	That, I think, is the question. Not so much what other
	countries think, but will we, by the printing press, cause more
	problems in the future than we can overcome?
	I appreciate the opportunity to hear our witnesses, Mr.
	Chairman.
	Chairman Paul. I thank you.
	I would like to now yield for an opening statement to Mr.
	Green from Texas.
	Mr. Green. Thank you, Mr. Chairman. I thank the ranking
	member, as well, and I thank the witnesses for appearing. And,
	of course, I thank the ranking member of the full committee,
	the Honorable Barney Frank.
	Mr. Chairman, I would like to start on a positive note and
	say that I concur with you 1,000 percent; we do have to
	ascertain what the cause was if we are to truly find a
	conclusion as to how to resolve the problem. We may differ on
	what the cause is, but I do agree that we have to know what the
	cause was.
	And I would also concur with you that U6 is a good
	indicator of what the unemployment rate really is when you add
	all of those who are marginally employed. QE1 and QE2 are
	important because they have infused capital into the economy.
	But when we look at the cause and we connect these two, we find
	that we have to ask ourselves, was the cause a lack of
	regulation or was it overregulation? I suspect not, in terms of
	over. Was it a case of regulators not really regulating? Was it
	the exotic products? If it was the exotic products, why were
	the exotic products allowed to exist in the first place?
	So there are plenty of questions to ask, and I plan to ask
	some of the witnesses today.
	But with reference to the inflation, I believe that the
	chairman has embarked upon a path that is going to help us have
	a softer landing than we would have but for the QE1 and QE2.
	Without them, it is counterfactual, but there are economists
	that tell us that we would have a landing that may have been a
	crash, and it may have been devastating for the economy, much
	more so than where we are now.
	I thank you for the time. I look forward to hearing from
	the witnesses. And I yield back.
	Chairman Paul. I thank the gentleman.
	Now I would like to yield time to Congressman Huizenga from
	Michigan for an opening statement.
	Mr. Huizenga. Thank you, Mr. Chairman. I appreciate the
	opportunity. In the interest of time, I have submitted my
	remarks, as well, and will try to shorten it up. And I
	appreciate you holding this subcommittee hearing today.
	By trade, I am a small-business owner and involved in both
	real estate and construction. And I now represent a district
	currently suffering an unemployment rate well above the
	national average, in Michigan. And one of the hearing's
	topics--and this particular hearing holds special significance
	for us back in Michigan.
	Earlier this month, the Bureau of Labor Statistics reported
	that the national unemployment rate fell from 9.4 percent to 9
	percent. That does not include the hundreds of thousands who
	have, frankly, stopped looking. That equates to 14 million
	people without a job. While this is a staggering number, in my
	home State of Michigan we are far worse off: 11.7 percent. And,
	again, that is not including those who have stopped looking.
	And in some of the areas in my particular district, along the
	lakeshore, it is well over double the national average.
	As previously mentioned, I am a small-business owner at
	heart and believe such businesses are the backbone of the U.S.
	economy and provide more than two-thirds of American jobs. I
	understand the universal principles of successful business, and
	it is important that we recognize the appropriate role for
	government in that process. Simply put, the private sector
	creates jobs, not the public sector. And that is ultimately
	where that prosperity lies.
	It is clear to all small-business owners that responsible
	fiscal policy includes reduced government spending and the
	implementation of friendly tax and regulatory environments.
	They go a long way in creating an atmosphere for success.
	As we are having this discussion on QE1 and QE2, ultimately
	I believe that they have not proven to be an effective method
	in creating jobs. And I appreciate today us examining the
	effects that the Federal Reserve open market operations have on
	those long- and short-term unemployment rates. And, in
	addition, I look forward to carefully inspecting what potential
	role the Fed policies played in such artificial asset bubbles
	as that of the housing market between 2001 and 2008.
	So I look forward to today's, I would guess, robust
	conversation on the short-term effects. And I appreciate your
	holding this hearing, Mr. Chairman. So thank you very much. I
	yield back.
	Chairman Paul. I thank the gentleman.
	Now, I would like to yield time to Congresswoman Hayworth
	from New York, a new member to the committee.
	Dr. Hayworth. Thank you, Mr. Chairman.
	My home district is New York's 19th. It is the Hudson
	Valley. And we have a large portion of our constituency who
	have jobs in the financial services sector. And, frankly, all
	of our citizens are quite directly affected by what the Federal
	Reserve is doing and has done in the past. So I am honored to
	be working on this subcommittee, because examining the role of
	monetary policy in the financial crisis and in our response to
	it is crucial.
	History shows that an independent central bank that is
	making monetary decisions free of political influence can
	certainly enhance economic growth. It stabilizes the currency.
	That is very important. But that is very different from
	requiring a central bank to be held accountable for its
	decisions and to explain why it is making them. And it is
	certainly incumbent upon us to set that policy for monitoring
	and holding accountable.
	So that is our role here. And we are in service of the far
	larger goal, as my colleague from Michigan has said, of getting
	Americans back to work throughout the country. So I look
	forward to your testimony regarding how monetary policy has
	affected unemployment. I am sure it has.
	And I yield back the remainder of my time. Thank you, Mr.
	Chairman.
	Chairman Paul. Thank you.
	The Congressman from North Carolina, Walter Jones, has
	arrived. He is the vice chairman of this committee.
	Would you like to make an opening statement?
	Mr. Jones. No.
	Chairman Paul. We would like to announce and celebrate the
	notion that Walter is going to have a birthday tomorrow. So we
	want to wish him a happy birthday.
	Mr. Jones. Thank you.
	Chairman Paul. Okay. If we don't have any more opening
	statements, we are going to go to the guests that we have,
	those who are going to testify. I want to welcome all three of
	the individuals here today. And I will read a brief resume of
	each one, and then we will go to the discussion.
	First, on the left, we have Professor Thomas DiLorenzo,
	professor of economics at the Sellinger School of Business at
	Loyola University in Baltimore, Maryland, and a senior fellow
	at the Ludwig von Mises Institute in Auburn, Alabama. He
	received his Ph.D. in economics from Virginia Polytechnic
	Institute and State University at Virginia Tech.
	Next, will be Professor Richard Vedder, the Edwin and Ruth
	Kennedy Distinguished Professor of Economics at Ohio University
	and an adjunct scholar at the American Enterprise Institute. He
	received his B.A. in economics from Northwestern University and
	his M.A. and Ph.D. in economics from the University of
	Illinois. He is the author of, ``Out of Work: Unemployment and
	Government in Twentieth-Century America.''
	And finally, we will hear from Dr. Josh Bivens, an
	economist at the Economic Policy Institute in Washington, D.C.
	He received his B.A. in economics from the University of
	Maryland and his Ph.D. in economics from the New School of
	Social Research.
	Each will be given time for an opening statement, and their
	full statements will be put into the record.
	So I will first now defer to Dr. DiLorenzo.

	STATEMENT OF THOMAS J. DILORENZO, PROFESSOR OF ECONOMICS,
	SELLINGER SCHOOL OF BUSINESS, LOYOLA UNIVERSITY, BALTIMORE,
	MARYLAND

	Mr. DiLorenzo. Thank you, Mr. Chairman, and members of the
	committee for giving me this opportunity to appear here.
	To answer the basic question that has been posed by this
	hearing, can monetary policy really create jobs, as an academic
	economist, you are not surprised to hear from me that the
	answer is ``yes and no.''
	And the reason why I say ``yes and no'' is that the history
	of the Fed has been that it has created boom-and-bust cycles in
	the economy ever since it began its existence in 1914. And so,
	during the boom period, of course, it does create jobs, but the
	jobs that it creates, many of them are unsustainable jobs. I
	can recall hearing that Home Depot, when they laid off 7,000
	people in 1 day, these were jobs that people had invested in,
	they invested their lives, their careers, and then the rug was
	pulled out from under them. That is the sort of thing that
	happens with what we call the artificial boom and bust created
	by the Fed's monetary policies.
	And the key to it is that the monetary expansion that the
	Fed creates, it sometimes produces price inflation, but that is
	not the only problem. Another part of the problem is that it
	artificially lowers interest rates and induces businesses to
	engage in especially long-term investments that end up being
	unsustainable.
	In the latest boom-and-bust cycle, that was mostly in real
	estate and everything related to real estate. But it is not
	necessarily just real estate. And so, in this latest cycle
	then, you had people, mortgage bankers and insurance companies
	and everyone related in every way to housing construction
	investing years and years of their careers, and then they are
	out of work; they have to retool.
	The lower interest rates are not necessarily an unmixed
	blessing to everyone because they tend to reduce savings, and
	savings and investment are the key to productivity growth and
	job creation. And so, the downside of the Fed policy of
	lowering interest rates lower and lower is that it deters
	savings. And savings investment is really the key to having
	sustainable economic growth and job creation.
	The real damage occurs, then, during the boom cycle of the
	business cycle, where capital is misallocated. Too much of it
	goes into unsustainable areas, such as real estate in the
	latest bout here. And the best part, the good part, if you can
	say there is a good part to this boom-and-bust cycle, is now
	the bust is where the adjustments have to take place. And we
	have to get back to realistic prices, realistic interest rates.
	One problem the Fed creates, though, is, with its constant
	manipulation of interest rates, it really is an attempt at
	price controls. And I think the economics profession is almost
	unanimous in opposition against price controls. And interest
	rates are prices. And so, when the Fed tries to manipulate
	interest rates, it is really engaging in a policy of price
	controls. And a lot of people in this room, I am sure, remember
	what a disaster that was in the 1970s, with price controls on
	oil and gas.
	Now, government policies that bail out businesses, which we
	have seen, is really a contradiction of an age-old rule of
	economics with regard to monetary policy. The rule was, in the
	case of a recession like this, it is a good idea for the Fed to
	make credit available to sound businesses that have been
	responsible and made good decisions, but not make more credit
	available to those businesses who have made bad decisions. And
	it is better off to let them go bankrupt, out of business, and
	have those resources be picked up, reallocated by people who
	will make better use of them. But, of course, the Fed has done
	exactly the opposite of that in the recent years.
	And so, as applied to today's situation, I think a very
	strong case could be made that the cause of the boom was the
	Greenspan Fed's low-interest policies. So the Fed did create
	some jobs with the boom; it is responsible for creating those
	jobs. But I think it is also responsible for the high
	unemployment that we now suffer to a very large extent because
	of the bust that has occurred.
	It also has created mismatched unemployment, what
	economists used to call mismatched unemployment, which I
	referred to a minute ago, in terms of people investing in jobs
	and careers that ultimately are not sustainable for a long
	period of time.
	Historically, the Fed, right from the very beginning, as
	soon as it started in 1914, it doubled the money supply by that
	date in 1920 and created the Depression of 1920. It was the
	worst depression in the first year of the Great Depression. And
	a strong case can be made--and I can refer any of the Members
	to literature if they would ask me for it, as to where you can
	read up on how the boom and bust of the 1920s was caused by the
	Fed, as was, I would even argue, the Great Depression was
	ignited by the expansionary monetary policy of the Fed, not the
	restrictive monetary policy of the Fed, that occurred from 1929
	to 1932.
	I see my time is about up. So, in summary, I will say that
	the Fed's monetary policies do create temporary but
	unsustainable increases in employment, while being the very
	engine of recession and depression, even, that creates
	unemployment in the long run. And it needs to step back, in my
	view, and let the market work and create a lot more stability
	by quitting its attempts to manipulate the price of credit,
	interest rates.
	Thank you very much.
	[The prepared statement of Dr. DiLorenzo can be found on
	page 72 of the appendix.]
	Chairman Paul. I thank the gentleman.
	I would like to now defer to Professor Vedder for his
	statement.

	STATEMENT OF RICHARD K. VEDDER, DISTINGUISHED PROFESSOR OF
	ECONOMICS, OHIO UNIVERSITY

	Mr. Vedder. Thank you, Dr. Paul.
	The one-word executive summary of my answer to the
	hearing's question, can monetary policy really create jobs, the
	one-word answer is ``no.'' And I would agree with Dr.
	DiLorenzo, no, not in the long run, or no, not on a sustainable
	basis.
	A little historical context: The first decade of this
	century had the lowest rate of economic growth of any decade
	since the Great Depression. Employment growth was the lowest in
	6 decades. Inflation-adjusted equity prices fell sharply.
	In large part, I think this reflects a multitude of faulty
	government policies, certainly on the fiscal side. Federal
	spending soared, increasingly financed by borrowing. The ratio
	of national debt to output is at a historic high for a
	relatively peaceful period. And on the monetary side, we had
	the worst financial crisis since the Depression, with many
	iconic financial institutions closing their doors or only
	surviving because of Federal bailouts. And despite all these
	huge Federal exertions on both the fiscal and monetary side, we
	have had the weakest recovery going on now in the lifetime of
	most persons in this room.
	Moreover, I think the huge run-up in the ratio of Federal
	debt to output will be a significant drag on the economy for
	many years and may well lead the Fed to monetize this debt or
	part of this debt, unleashing a wave of inflation that can only
	undermine our economy.
	Turning to the 2008 fiscal crisis, financial crisis,
	certainly private irrational exuberance may have occurred to
	some extent. The crisis largely resulted from three types of
	government policies, failures.
	First, as Tom DiLorenzo indicated, the Federal Reserve for
	years prior to the crisis pursued an easy money policy,
	reducing interest rates below levels justified by human
	behavior and market conditions. This led to the artificial boom
	in housing prices.
	Second, the Feds encouraged imprudent lending practices
	through such things as the Community Reinvestment Act, HUD
	policies going back to the 1990s designed to promote
	homeownership.
	Third, Fannie Mae and Freddie Mac, government-sponsored
	corporations, promoted totally inappropriate lending practices
	that contributed to the housing bubble and the foreclosure
	mess. Congress blocked attempts to rein in these companies, no
	doubt, frankly, because of the campaign contributions these
	companies made to Members of this body.
	I am an economic historian. And both economics and
	historical experience demonstrate that Federal intrusions into
	economic activity are counterproductive. Some textbooks even
	talk about the ``policy ineffectiveness theorem.'' Aggressive
	deficit spending and Federal Reserve monetary expansion led to
	stagflation in the 1970s. Japan went on a huge binge of
	stimulus spending in the 1990s, and economic growth virtually
	ground to a halt. The excesses of the European welfare state
	and its funding are causing crises all over the European Union,
	from Ireland to Greece. The stimulus plans of the Obama
	Administration were accompanied by rising, not falling,
	unemployment. Bailouts and ``too-big-to-fail'' policies have
	created a huge moral hazard problem. The Federal Reserve has
	engaged in huge purchases of government long-term bonds and
	mortgages to keep interest rates low. But long-term interest
	rates are not falling, as concerns about potential inflation
	justifiably have risen.
	So, by many indicators, this is the weakest post-war
	recovery, not because we have tried too little, but because we
	have tried too much. The Fed and the government have monetary
	and fiscal time bombs that are threatening both the short-term
	recovery but, more importantly, long-term financial and
	economic stability.
	So what do you do? I would point out that our economy
	achieved economic supremacy in the world from 1871 to 1914, a
	period of the gold standard, near-stable prices, and no central
	bank. Consumer prices in 1914 were within 10 percent of what
	they were in 1871. We can learn from that experience.
	To restore monetary stability, ideally we would ultimately
	consider retreating somewhat from the fractional reserve
	banking system we have, where even moderate declines in
	confidence potentially lead to devastating consequences. But
	more immediately, we need to limit monetary growth. And, given
	human weaknesses, probably the best way to do this ultimately
	is having a gold standard or some variant that removes or
	dramatically reduces the discretion of central bankers.
	But on the fiscal side, politicians, unfettered by rules,
	behave, I would say, like unsupervised alcoholics in liquor
	stores. We need some sort of constitutional restraints on
	government fiscal actions. Practically, changes of this
	magnitude take time, but, in the short run, however, I think
	you could start holding the Fed's feet to the fire. Perhaps,
	for starters, you should establish price stability as the
	single monetary mandate for the Fed. Perhaps you should repeal
	the Humphrey-Hawkins Act and privatize or abolish Fannie Mae or
	Freddie Mac.
	After that, you can rest on Sunday.
	[The prepared statement of Dr. Vedder can be found on page
	77 of the appendix.]
	Chairman Paul. I thank the gentleman.
	We will move on now to Dr. Josh Bivens for his statement.

	STATEMENT OF JOSH BIVENS, MACROECONOMIST, ECONOMIC POLICY
	INSTITUTE, WASHINGTON, D.C.

	Mr. Bivens. Thank you. I would like to thank the committee
	and the chairman for inviting me here today.
	The subject of this hearing is, can monetary policy really
	create jobs? I am going to say the answer is a barely equivocal
	``yes,'' and the equivocation just being it can create jobs as
	long as the economy is performing below potential. And the
	economy is performing below potential today.
	The argument--I am going to start with just a little bit of
	theory. Of course, theory alone can't end the discussion, so
	then I will talk about some evidence on monetary policy's
	effects.
	So the theory--sometimes the cause of recessions are pretty
	hard to reconstruct. Not so in what we are now calling the
	``great recession.'' The bursting of the housing bubble led to
	home builders waking up, realized they had massively overbuilt,
	so residential investment collapsed. The 30 percent fall in
	home prices also erased about $7 trillion in wealth from
	household balance sheets, so they predictably radically
	curtailed their spending.
	These initial shocks then cascaded throughout the economy.
	Businesses stopped investing because customers aren't coming in
	the door. Why would you build a new factory when the one you
	have can't even sell what it is producing?
	And so, in the jargon--and, for once, the jargon is kind of
	important--the economy suffered a shock to aggregate demand.
	The clear fact that this recession was the result of a shock to
	aggregate demand is key. Americans workers didn't lose their
	skills in December 2007. American factories didn't become
	obsolete in that month. American managers didn't forget how to
	organize production in that month. Nothing changed about the
	American economy's ability to supply goods and services. All
	that changed was the ability of households and businesses to
	purchase them. The erasure of all the wealth from the housing
	bubble was a shock to aggregate demand.
	So what the Fed tried to do is stabilize economic activity
	by providing a countervailing spur to demand with the levers
	they have. The primary lever they have is short-term interest
	rates. By lowering these short-term rates, or policy rates, the
	hope is that interest rates up and down the term and risk
	structure fall in sympathy. That makes it cheaper for
	businesses to borrow to expand capacity. That makes it cheaper
	for households to borrow to buy new houses, and durable goods.
	It also provides a one-time boost to asset prices. And so this
	decline in policy interest rates is meant to provide a
	countervailing, positive spur to the aggregate demand that was
	quashed by the bursting of the housing bubble.
	And all this happened as the great recession approached.
	The Fed started cutting these policy rates in August 2007. They
	provided extraordinary support to failing financial
	institutions early in 2008. And about halfway through the great
	recession, the policy rates they controlled had kind of run out
	of ammunition. They were sitting at zero.
	They could have just stopped there. As the economy was in a
	complete free fall, as the primary parachute they have
	available to them obviously wasn't sufficient, they could have
	stopped there. They didn't. And it is a good thing they didn't.
	They continued to try to find other ways to provide support to
	the economy with the quantitative easing programs.
	And these interventions worked. If you look at when the Fed
	introduced the Term Asset-Backed Securities Loan Facility, the
	day that was introduced, credit spreads on asset-backed
	securities started to rapidly fall. That was very good for the
	economy. It meant people could actually get credit again.
	Researchers from the San Francisco Fed say that the
	announcements of both rounds of quantitative easing caused
	interest rates to fall up and down the term structure. Some of
	the members of the committee may have noticed that 30-year home
	mortgages fell to something like 4 percent in the past couple
	of months. Some of us in this room may have even refinanced
	their mortgages. I actually did. It saved me a lot of money,
	and provided a spur to my spending power. That is very good for
	the economy. That is one channel that is supposed to work.
	Just that channel alone, the ability to refinance, some
	researchers at JPMorgan Chase have estimated that, if all the
	mortgages guaranteed by Fannie Mae and Freddie Mac had been
	able to take advantage of those 4 percent rates we saw a couple
	of months ago and refinance, that would be a permanent $50
	billion spur to spending potential in the economy. That is just
	one channel through which monetary policy can help people start
	spending again, and businesses.
	And if you look back, you look at studies of what ended the
	Great Depression, Christina Romer, eminent economic historian,
	the former CEA chair for the Obama Administration, she says
	that monetary easing was a key part of what ended the Great
	Depression. I would say she is actually criticized in this view
	by, say, Milton Friedman, probably the most famous conservative
	economist, only because he thinks the Fed should have done much
	more, loosened much more to fight the Great Depression.
	If you look at Adam Posen, probably the closest observer of
	what happened in Japan in the 1990s, he points to the fact that
	Japan actually had a pretty good recovery from 2002 to 2008
	when they finally started engaging in the unconventional
	monetary easing that the Fed has done during the great
	recession. It was the first time Japan had seen serious growth
	in decades.
	The Japanese case is also instructive because they had a
	20-year period where they kept the short-term interest rates
	that they controlled, the Bank of Japan, near zero. They
	engaged in lots of quantitative easing. The cumulative
	inflation rate over those 2 decades was less than 5 percent.
	The United States has seen inflation of over 5 percent, or
	close to 5 percent, in a single year in the 2000s. So this idea
	that monetary easing always leads to inflation, no matter what,
	is just not supported by the facts.
	And so, my time is up, and I just want to say one thing. I
	would say that the Fed has been by far the policymaking
	institution most aggressive in its response to the job crisis
	caused by the great recession. It acted first, it acted most
	aggressively, and it continues to display a real sense of
	urgency about the need to support the economy and create jobs.
	Thank you for your attention.
	[The prepared statement of Dr. Bivens can be found on page
	51 of the appendix.]
	Chairman Paul. I thank the gentleman.
	We will now go into our question session. Each Member gets
	5 minutes to ask questions.
	And just to let you know that if the discussion is still
	going on, we will have a second or even a third round of
	questions if you are interested in the subject and you want to
	hang around.
	First, I will start off with asking Dr. Bivens a question,
	because you have talked a little bit about interest rates and
	how valuable it has been to the economy for the Fed to lower
	interest rates. But isn't it true that there comes a point
	where they can't accomplish that, where the effort to lower
	interest rates doesn't actually lower interest rates?
	And we may be even entering that period right now. There is
	a lot of monetary inflation right now with QE2, and there are
	signs that bonds aren't doing as well and they may be shifting.
	What happens to those who agree with your policy? What do
	they do if the more they inflate, the higher the interest rate
	goes? And, in a way, we had that in the 1970s, as well. Then
	what do you do? What is the policy that is necessary to
	counteract that when interest rates are going up when you don't
	want them to go up?
	Mr. Bivens. A couple of things--one, you mentioned the
	experience of the 1970s. To me, the experience of the 1970s,
	why interest rates were high was because inflation rates were
	high. And so, my best guess over the next couple of years--and
	it is a guess based on a firm historical relationship between
	how much slack is in the economy and inflation rates--we do not
	have to worry about spiking inflation in the economy any time
	in the next couple of years.
	So your scenario where the Fed continues to ease, maybe
	undertakes even another round of quantitative easing and
	somehow interest rates in the long term start rising, I would
	say they would need to reassess the policy then. But my read of
	the evidence so far is that, with each announcement of the
	rounds of quantitative easing, you have seen a robust fall in
	interest rates across the risk and term structure, which was
	exactly the target. And it has filtered through to more
	spending in the economy.
	Chairman Paul. I thank you.
	And I would like to get a comment from Dr. Vedder or Dr.
	DiLorenzo on that subject.
	Mr. Vedder. Let's first talk about--the QE2 was announced
	on November 3rd. It is now February 9th. What has happened to
	the interest rates on 10-year or 30-year Federal Government
	securities in that interim? My read of the evidence--and I just
	look at the interest rate yesterday versus November 3rd--is
	that the interest rate on 30-year government bonds has risen
	somewhere between 65 and 70 basis points. The interest rates on
	10-year notes has gone up more than 100 basis points. This has
	not moved down. It is not even staying still. It is going up.
	Now, in that period, we are buying, what, $50 billion of
	bonds a month? We bought several hundred billion--the Fed now
	owns a trillion dollars' worth of long-term securities, I
	believe, or close to it, the better part of that.
	To me, that is just the evidence. And it suggests that your
	concern, Dr. Paul, is correct, that the increased inflationary
	expectations have overwhelmed the effects, the immediate
	effects the Fed has when it pushes up bond prices when it buys
	securities. So I think your concern is valid.
	Mr. DiLorenzo. Yes, I agree, that is what we are seeing, is
	inflationary expectations driving up those interest rates. And
	it might not be hyperinflation, but we are beginning to see it.
	And you have seen some of the inflation around the world, too.
	A lot of the U.S. dollars that are in circulation end up
	overseas. And I think there is probably a connection between
	the high food prices that you are seeing in different places
	around the world with this inflation.
	But that is not the only problem that can be created by
	monetary expansion. It is the misallocation of resources. The
	Fed is creating a different kind of boom with its quantitative
	easing. And no one can predict what will happen, but in the
	next couple of years we could see another bubble. And I think
	it is likely to be much bigger than the housing bubble was. And
	then we will really be in trouble.
	Chairman Paul. I would like to ask Dr. Bivens first about
	his statement on page 7. He says, in short, the Fed saw the
	economic downturn coming before any other major macroeconomic
	policymaker body. And there have been a lot of others. What do
	you do with the free-market Austrian economists? And there were
	more than a few. How do you dismiss them so easily? Because
	they did predict it correctly.
	Mr. Bivens. Yes, I would absolutely not say the Fed was the
	first to see it coming of any economist. I have colleagues who
	warned in 2002 that home prices were getting too high. I meant
	to say they were the first major macroeconomic policymaking
	institution. They acted first.
	There are three big arms of macroeconomic stabilization:
	there is fiscal policy, Congress; there is monetary policy, the
	Fed; and there is exchange rate policy controlled by the
	Treasury. And of those three institutions, the first one to
	start providing lots of easing to the U.S. economy was the Fed.
	Chairman Paul. Okay. My time is about up, but I just want
	to go on to the next speaker by quoting Mr. Bernanke, and this
	was in the fourth quarter of 2007: ``We may see somewhat better
	economic conditions during the second half of 2008. This
	baseline forecast is consistent with our recently released
	projections, which also see growth picking up.''
	He had no idea that it was coming. He was so reassuring,
	and he misled so many people. And I just think there is a lot--
	and if I had more time, I would get other comments, but maybe
	later on. But it just seems like the Fed was way behind on this
	whole issue. I would hate to think they were the first ones to
	warn us. I think they were the last ones to even recognize what
	was going on.
	Okay. And I will now yield to the ranking member, Mr. Clay.
	Mr. Clay. Thank you, Mr. Chairman. And, again, let me
	commend you for calling this hearing. The causes of
	unemployment and how government and the private sector can
	respond to and mitigate this crisis are extremely important.
	And I thank you for your leadership on this issue right at the
	start of this Congress.
	Dr. DiLorenzo, you belong to the Austrian school. And we
	don't have time for a debate on various economic theories.
	However, the Austrian school is different from mainstream
	theories in its lack of a scientific method and rejection of
	empirical data. You don't use the scientific method and instead
	employ deductive reasoning. You apply preconceived
	generalizations to your work. You are kind of asking us to take
	your word for it.
	Without data, without providing verifiable results, it is
	difficult for others to evaluate the merits of your work, and
	we must rely on your body of work itself.
	Doctor, you are here today representing yourself as an
	economist. However, it has been difficult for my staff to
	locate any recent work of yours as an economist. It seems that
	for the past 15 years or so you have published books, written
	many articles, and given lectures as an historian.
	The lines among the social sciences can sometimes get
	blurry, and I am not going to quibble about academic
	distinctions. But if your work was on labor history, historical
	patterns of unemployment, even the history of the Federal
	Reserve on monetary policy, I can understand you being here
	today. But I am a little confused. It seems to me that the bulk
	of your work has been in revisionist history about our 16th
	President, Abraham Lincoln, and the Civil War.
	Also--and this is where my confusion deepens to concern--
	you work for a Southern nationalist organization that espouses
	very radical notions about American history and the Federal
	Government. This organization, The League of the South, has
	been identified as a hate group by the Southern Poverty Law
	Center.
	Now, the Law Center is an organization that I deeply
	respect, and so naturally this concerns me. The League of the
	South is a neoconfederate group that advocates for a second
	Southern secession and a society dominated by European
	Americans. It officially classifies the U.S. Government as an
	organized criminal enterprise.
	Dr. DiLorenzo, you are listed on their Web site as teaching
	for their League of the South Institute. A short list of your
	many articles includes: ``More Lies About the Civil War'';
	``The First Dictator-President'', referring to Abraham Lincoln;
	``In Defense of Sedition''; ``Libelist Leftist Lynch Mobs,''
	insensitively using a loaded term to refer to academic
	criticism of a White professor; ``Abe the Mass Murderer'';
	``Hurrah for `Sweatshops'''--I guess you could sort of claim
	that the title at least is somewhat connected or something to
	do with economics; and ``Hitler Was a Lincolnite.''
	After reviewing your work and the so-called methods you
	employ, I still do not understand your being invited to testify
	today on the unemployment crisis, but I do know that I have no
	questions for you.
	Let me go to Dr. Bivens.
	And there are some factual errors in the testimony
	presented here today that I believe need to be corrected.
	First, even though it was suggested that it was the excessive
	expansionary monetary policy of the Fed that caused yet another
	boom-and-bust cycle that spawned the Great Depression, the
	facts do not bear this out.
	And, according to congressional research, between 1925 and
	December of 1928, the money supply increased at a very modest
	rate of 3.4 percent. Even if we look at a larger timeframe from
	July of 1921 to July of 1929, it grew at a rate of 4.8 percent
	per year. There is nothing particularly rapid about these
	rates, much less anything approaching excessive expansion.
	Dr. Bivens, can you confirm this for us?
	Mr. Bivens. The exact numbers, no. But they definitely
	comport with my sense of that period, which is there was no
	excessive monetary expansion before the Great Depression. And
	even again, Milton Friedman, conservative economist, if he has
	a criticism of the Fed during the Great Depression, it is that
	they did not ease quickly enough, they did not provide enough
	monetary support to the economy. So they comport with my sense
	of what happened during that period.
	Mr. Clay. Thank you for responding.
	Mr. Chairman, I yield back.
	Chairman Paul. I now yield to Congressman Jones from North
	Carolina.
	Mr. Jones. Mr. Chairman, thank you very much, and thank you
	for holding this hearing.
	I want to thank the panelists.
	And, Mr. Chairman, about a week ago, I decided that the
	frustration of the American people in the 3rd District of North
	Carolina, which I represent, was so great and their
	disappointment in the United States Congress and things we have
	done--talking about both parties--that I would take it upon
	myself to say, if you will help me with questions for the
	panelists for this whole year--I am delighted to be on this
	subcommittee, by the way--that I will use some of your
	questions when my time comes.
	So, Mr. Chairman, in a week's time, we got over a thousand
	e-mails from my district. I am going to read two; then I want
	to get to a point:
	``Our Congress Members, for the most part, must be the most
	financially illiterate group of men and women on the planet.
	Why would they need a study group on domestic monetary policy
	and technology to figure out you don't print more money to
	create jobs that are backed by virtual money, or funny money? I
	believe we need to fire all these people and get a couple of
	housewives who have been managing their family budget over the
	years without credit cards, lines of credit, and other creative
	ways to rob Peter to pay Paul.''
	This is a great example of how frustrated the American
	people are. That is why I do think this hearing today is
	important.
	Let me read the next one; then I want to get to the
	question:
	``As an owner of small businesses and a family borrower, I
	have not understood how the Federal Reserve can keep its
	interest rates at almost zero and then make lendable funds more
	available to the banks, while at the same time the banks have
	increased interest rates, decreased lines of credit, and
	restricted availability of loans to high-rated creditors like
	my businesses and other households. I can only see that the
	banks have improved their financial position on the backs of
	small businesses and families.''
	That basically is going to be my question. I am very
	frustrated; I am sure my colleagues in both parties are, as
	well. What you hear back home is this issue of how the banks
	have been empowered with the Federal Reserve and the other
	agencies so that they are able to swell their financial state
	and, at the same time, they are saying to those of us who are
	creditors, we are going to raise your interest rates on your
	credit cards, we are going to deny you loans because we have a
	certain criteria now.
	And this is why this country is in deep trouble, and it is
	going to continue in deep trouble. And that is why I think it
	is important that we hold these hearings about monetary policy,
	because the average American is out there strangling to death
	because of things that we do and don't do here in Washington.
	How would you answer the question to that constituent who
	wrote me that question? Anyone who would like to answer.
	Mr. Vedder. I think your constituent ought to be made a
	member of the Council of Economic Advisors or something of--it
	wouldn't be any worse than it is now, maybe a little bit
	better.
	Why are interest rates for the ordinary--why are people not
	borrowing a lot of money now? Is it because--the reason, of
	course, is--why are businesses sitting on $2 trillion in cash,
	roughly, right now? They are sitting on $2 trillion. You can
	have interest--interest rates don't matter. I don't say they
	don't matter. They are not the key thing.
	They are scared. People are scared. They are scared of a $4
	trillion increase in the Federal debt over the last 3 years.
	The housewife may not be sure why that is bad, but she knows
	that is basically not a good thing to do. She knows that
	printing money and dropping it out of airplanes, or the
	equivalent, which is what the Fed does, will not create jobs,
	will not create wealth. It might temporarily lead to some
	behavioral modifications that leave the appearance of some
	stimulus in the short run, but not in the long run.
	I happen to like Abraham Lincoln, by the way, and I went to
	the Lincoln Memorial today to read the Gettysburg Address. And
	I noticed that they have torn up--that they have drained the
	reflecting pool. And there is a sign in front of it that says,
	this is part of the stimulus--whatever, the reinvestment--I
	don't remember the name of that thing--reinvestment act. And
	they also had a sign next to it that said, we are going to fill
	it back up again. We can drain the reflecting pool and fill it
	back up again and probably put a few people to work for a day
	or 2, but that doesn't create jobs.
	People are scared. And banks have partly raised interest
	rates, to get more specific, on some types of credit because
	they feel they have to because of the Dodd-Frank bill. Another
	thing, when they see light at the end of the tunnel, you add on
	more tunnel. Not you, personally, Congressman, but your
	colleagues add more tunnel. And we have added more tunnel.
	So we have the Dodd-Frank bill that has all kinds of new
	restrictions on banks and financial institutions. They have to
	make up the money somewhere. They are not going to just simply
	say, oh, we are going to let our profits fall to zero, and we
	are going to become a charitable institution, a not-for-profit.
	That is not the way banks operate. So they have raised a lot of
	fees and so forth. So that has added to the frustration.
	Mr. Jones. Would you like--
	Mr. Bivens. Yes, could I have a very quick response to
	that, as well?
	I will say one thing. If you look at the survey of small
	businesses, the National Federation of Independent Business
	recently over the past year, you ask them, what is the number-
	one problem facing you, overwhelming highest response in
	history: sales; there are no customers.
	And so then the question is, can monetary policy actually
	create some customers for those businesses? And it absolutely
	can. When you saw the ability to refinance mortgages at 4
	percent, that freed up a lot of money for households. When you
	lower interests up and down the term and risk structure, you
	make it much cheaper for businesses who are on that razor's
	edge--``Should I borrow a little money to expand? It is
	uncertain out there''--but you make it much easier for them to
	do that.
	And the idea that there are inflationary expectations
	driving up long-term rates, there just are not. The clearest
	indicator of inflationary expectations that economists use is
	the tip spread, the spread between inflation index treasuries
	and nominals. That was at historically low levels a couple of
	months ago. Now it is still below 2 percent lower than it was
	at any point during the 2000s. There is just no sign that
	inflationary expectations are out of line and that is what is
	driving anything like long-term rates rising.
	And then just one last thing. I am no defender of the
	banks, but, actually, if you are worried the banks are having
	too easy of a time by borrowing cheap, short term from the Fed,
	and then raising long rates on what they are lending to their
	customers, quantitative easing actually squashes that spread.
	It actually makes it less hospitable for banks to do that. So
	if you don't like the banks, kind of, riding the easy term
	structure created by what the Fed is doing to short-term rates,
	you should like the quantitative easing program.
	Mr. Jones. Thank you.
	Mr. DiLorenzo. Is there time for one more comment on that?
	Chairman Paul. Go ahead.
	Mr. DiLorenzo. I would add, since I have written three
	books that include a history of banking, so contrary to what
	Mr. Clay had to say about me, what we have been experiencing is
	what economists call ``regime uncertainty.'' With all the
	uncertainty of the Fed changing policy month by month--the
	threat of huge taxes for socialized medicine, the re-regulation
	of banking with the Dodd-Frank bill--businesses sit back and
	wait because there is so much great uncertainty about the
	future with all of these regulatory changes and tax changes.
	And that is one of the things that is keeping them from
	lending to businesses. The businesses are putting a lot of
	their business plans on hold. And the economist Robert Higgs is
	best known for research on this whole area of regime
	uncertainty, and I think that is an important thing to factor
	in there.
	Chairman Paul. I now yield 5 minutes to the Congressman
	from Texas, Mr. Green.
	Mr. Green. Thank you, Mr. Chairman.
	I thank the witnesses, as well, again.
	What we have, apparently, is this philosophical debate
	about how jobs are created. Do millionaires create jobs, or do
	millionaires simply respond to demand and, as a result, they
	facilitate the creation of jobs because there is demand?
	Smart money doesn't create jobs just because it exists.
	Smart money creates jobs when there is a demand to be met. Is
	that, in essence, what you are trying to say or have been
	saying, Dr. Bivens?
	Mr. Bivens. Yes, I think that is a fair summary.
	Mr. Green. And is it true, sir, that jobs and employment,
	that these factors are considered lagging economic indicators,
	employment?
	Mr. Bivens. That is right. I think that is fair to say, as
	well. The last couple of recessions, you have seen GDP go up.
	Mr. Green. Right. And while other things will come back at
	a relatively different pace--let's say it this way: Jobs will
	be among the last things that will return, especially when you
	have a sharp downturn in the economy. And it is also fair to
	say that, because of some of the structural changes in the
	economy, there are some jobs that won't return. Is this a fair
	statement?
	Mr. Bivens. I think we will have a different-looking
	economy coming out of this than we did. We are going to have
	fewer construction jobs when we eventually get out of this and
	get out of the jobs hole. Hopefully we have some more
	manufacturing jobs. So, yes, I think there is something to
	that.
	Mr. Green. Also, changes in technology. A few years ago, we
	had technology that was greatly different. Something as simple
	as developing film, the technology has changed. So you won't
	have those jobs. Record companies won't have jobs. The
	structure of the economy is changing as well.
	So I would like for you, if you would, to just do this for
	me. Take a moment and explain, if you would, how the lagging
	indicator of jobs returning, employment, how that will manifest
	itself as we go forward. Is that something that will happen
	immediately, or will we see signs of it?
	And, also, does it rise and fall based upon people who are
	out of the employment market coming back into the market? Does
	that then cause the job numbers to go up again? And then as
	more people are employed, it comes down again? Please talk
	about it.
	Mr. Bivens. Yes, you raise a lot of interesting points.
	First, I will say that the observation that jobs are a
	lagging indicator should absolutely not be taken as
	``everything is fine, and the jobs will come back,'' even at
	the current pace of economic growth. That is not the case. If
	you want jobs to come back really quickly, you need to boost
	economic growth that much quicker. And so I would say monetary
	ease.
	But, yes, then the other issue is, you are right. If you
	look at the number of jobs lost between 2007 and today, it is
	roughly 7 million. But we should have created well over 3
	million in that time period just to keep pace with population
	growth. Those people who didn't join the labor force over the
	past 3 years will start joining it if jobs start becoming
	available again. And so that means the unemployment rate is
	going to be very, very stubborn in coming down over the next
	couple of years, even if we get some good output growth, some
	good employment growth.
	But that said, if you look at the agonizingly slow
	recovery, the 2001 recession, or the very slow recovery of
	today compared to the quick recovery of the early 1980s; the
	thing that distinguishes them is that output grew much faster
	in the 1980s. And part of what explains that output growth, as
	I say in my written testimony, is the Fed had a lot of room to
	provide a lot of monetary support to the economy, and they did.
	They cut interest rates by 10 percent. That sparked both output
	and jobs growth.
	So I think you are right. I think, even as jobs come back,
	the unemployment rate is going to be very, very stubborn
	because of all those jobs that were not created. But we really
	should say we cannot be satisfied with this pace of economic
	growth.
	Mr. Green. Thank you.
	Let me quickly respond to something that was said about the
	CRA, and Fannie and Freddie to a certain extent. We do have to
	make a distinction between causes and contributing factors. The
	CRA did not create 3/27s, 2/28s, teaser rates that coincided
	with prepayment penalties, no-doc loans. All of these exotic
	products were not created by the CRA. It may have been a
	contributing factor, Fannie may have been a contributing
	factor, as well as Freddie. But we shouldn't label contributing
	factors as causes.
	These products that were created were created in an
	environment where you had either a lack of regulation or
	regulators that were not properly adhering to regulations,
	following the law, making others follow the law.
	Mr. Bevins, could you just comment on this briefly?
	Mr. Bivens. Yes, I think I agree with all of that. The idea
	that especially Fannie Mae and Freddie Mac were prime drivers
	of the housing bubble just doesn't work when you look at the
	evidence.
	As the housing bubble gets under way in the early 2000s, as
	home prices go through the roof, and as these exotic mortgages
	come online, Fannie and Freddie hemorrhage market share. They
	lose it to all of the private servicers.
	They, unfortunately, start to try to get into the game a
	little later in the decade, and they shouldn't have. That is
	clear. But they were not--they were followers. They were
	absolutely not leaders. And so, the idea that the housing
	bubble can be laid at their feet, I think, is just wrongheaded.
	Mr. Green. Thank you, Mr. Chairman.
	Chairman Paul. I now yield 5 minutes to Congressman
	Luetkemeyer from Missouri.
	Mr. Luetkemeyer. Thank you, Mr. Chairman.
	A while ago, Dr. DiLorenzo, you talked about another bubble
	coming. Can you elaborate on that just a little bit?
	Mr. DiLorenzo. With all the so-called quantitative easing
	that the Fed is engaging in, it is more of the same policy that
	created the real estate bubble in the first place. And, at that
	time, it reallocated a lot of capital into housing and housing-
	related industries. And so, even if we are not seeing price
	inflation, we have all this credit out there, the potential for
	lending. And, of course, the banks aren't lending as much as a
	lot of people would like to see them lend.
	And so we can't really predict where the next bubble will
	be, but it was in the stock market--before the housing bubble,
	there was a stock market bubble. And the Fed responded to that
	bubble with the policy of low interest rates that created the
	housing bubble. And so I fear that we are going to have another
	one because of the amount of money that is being put in
	circulation is orders of magnitude greater than what the
	Greenspan Fed did.
	But no one can forecast or predict what industry it is
	going to hit, and so I am afraid I can't help you there. But I
	am pretty confident that we should be worried about it.
	Mr. Luetkemeyer. What you are saying, though, is that, as a
	result of the money supply, there will be another bubble,
	because you are putting into the system some sort of an anomaly
	that will cause something else to happen somewhere else, such
	as--
	Mr. DiLorenzo. Yes. What happened with real estate is the
	low interest rates made it much more profitable to invest in
	long-term investments when interest rates go down. And so, all
	that money and resources is poured into real estate especially,
	and it ended up not being sustainable.
	Mr. Luetkemeyer. Do you have a best guess as to where it
	may happen next?
	Mr. DiLorenzo. We have some criteria. Like, one of the
	reasons why I think it happened in real estate and it was such
	a catastrophe was all these new products, new financial
	products, and there were a lot of people who really were
	confused by them.
	And so, just as a general rule, in industries that are
	relatively new, where there is uncertainty on the side of the
	consumer, that is where the trouble can be. And so that might
	lead to a lot of possibilities. But I can't--I don't have any
	particular industry that I could--maybe Professor Vedder does.
	I don't.
	Mr. Vedder. I think economists who make predictions are
	foolish.
	Mr. Luetkemeyer. Are there a lot of Fed economists around?
	Mr. Vedder. A lot of failing economists?
	Mr. Luetkemeyer. No. Aren't there a lot of economists at
	the Fed?
	Mr. Vedder. There are a lot, and there are a lot of
	mistakes that are made. Dr. Bivens mentioned with great
	admiration Christina Romer, whose most famous quote in modern
	times was her quote early in 2009 when she said, ``If the
	stimulus package passes, the unemployment rate will not go
	above 8 percent.'' It is at 9 percent now and has been to 10
	percent.
	And so, I agree with Tom that we have a ticking time bomb
	out there, and exactly what the shape of the disaster will be I
	don't know. We have these mammoth excess reserves at banks.
	And Dr. Bivens is actually right, he is absolutely right,
	we haven't had a huge amount of inflation now. And it is true
	people aren't spending a lot of money now. Why aren't they
	spending money? Is it because interest rates are too high? No.
	It is because they are scared. They are just downright scared.
	They are scared because, ``Oh, we don't know this Obamacare,
	what it is going to do to us.'' We have had a regime change.
	People are scared. We are not used to big changes all at once.
	And because of that--but we have the potential for a disaster.
	Mr. Luetkemeyer. Okay. Very good. Thank you.
	Dr. Bivens, you made a comment a while ago--you were
	discussing Japan. And they have had many, many influxes of cash
	into their economic system, QE2, 3, 4, 5, 6, whatever. And you
	made the point that it was able, as a result of that, to sort
	of help keep inflation low and interest rates low.
	My concern is that their economy still is struggling. And
	it has been that way for 15, 20 years. If QE2 is supposed to be
	the end-all, be-all to help us create jobs and get our economy
	going, how do you correlate those two?
	Mr. Bivens. If you look at Japan, it pretty much had a lost
	decade of the 1990s, and they were sort of riven with internal
	debate about just how aggressive to get with monetary policy.
	And they never actually did, sort of, the unconventional large-
	scale asset purchases that the Fed has been doing. And--
	Mr. Luetkemeyer. Yes, but didn't they put a lot of money
	into the system, though?
	Mr. Bivens. They kept interest rates very low, yes.
	Mr. Luetkemeyer. That is my point. My point is, if we go
	along with the Fed's mindset here and policy of throwing more
	money into the system and we look at Japan as an example, over
	many years and on many QE2s or QE1s or whatever, and it didn't
	really do what we are hoping that this QE2 over here is going
	to do, what is the thought process that would lead one to
	believe that ours is going to be different than theirs?
	Mr. Bivens. It won't be different. They only saw a real
	recovery between 2002 and 2008 when they started doing the
	QE2s. Before that, they sat at zero, but they did no more. They
	said, we can't do anything else unconventional, you just don't
	do that. Everyone--not everyone--many people said, no, the
	economy needs more.
	When they finally started doing more on the monetary side,
	they actually saw a pretty decent recovery during 2002 to 2008.
	And then, of course, everybody, globally, went into the great
	recession.
	Mr. Luetkemeyer. Okay. I see my time is up. Thank you, Mr.
	Chairman.
	Chairman Paul. Thank you.
	I want to yield 5 minutes now to Congresswoman Hayworth
	from New York.
	Dr. Hayworth. I yield my time at this time, Mr. Chairman.
	Thank you.
	Chairman Paul. Okay. Thank you.
	I yield 5 minutes to Congressman Huizenga from Michigan. Is
	he not here?
	Okay. I yield 5 minutes to Congressman Schweikert from
	Arizona.
	Mr. Schweikert. Thank you, Mr. Chairman, committee members,
	and witnesses.
	I may be one of those who is a little less interested in
	what is going on now or the last couple of years. I can grab a
	financial paper and read that. What I am trying to get my head
	around is a central bank and the monetary policy as we run it
	as a country for the last, let's call it, 100 years. Does it
	exacerbate the swings and, therefore, in many ways, unemploy
	more people and make the troughs much deeper?
	For any of you, if someone like myself wanted to sit and
	read and get better educated, where in the literature do I find
	the best scholarly, fairest, and most detailed papers? Let's
	start from the left.
	Mr. DiLorenzo. There are several treatises on the history
	of money and banking. One of them is authored by Richard
	Timberlake, who has taught economics at the University of
	Georgia for many years. He is retired now. There is another one
	by Murray Rothbard, ``A History of Money and Banking in the
	United States.'' And those are both very good books.
	And since you are a very busy Member of Congress, that
	sounds like a tall order to begin with, but--
	Mr. Schweikert. One of the joys of being from Arizona is
	that I have a 5-hour flight both ways.
	Mr. DiLorenzo. Okay, those are two books I would pick up.
	But, also, this weekend there is a conference at Wake
	Forest University under the title, ``The Fed Was a Mistake.''
	And there is a professor from the University of Georgia named
	George Selgin who is giving a presentation based on an academic
	paper. And he has looked at the last hundred years of the Fed's
	performance, the very question you are asking. And I can put
	you in touch with Professor Selgin, if you really would like
	to, for your next flight back to Arizona.
	But he was actually at my university last week and gave
	this presentation, a PowerPoint. And he looked at all the Fed's
	obstensible goals--price stability, unemployment--and makes the
	case that the Fed has, in general, failed, although it has not
	been a dramatic failure, but it was a failure nevertheless to
	stabilize prices and unemployment.
	Mr. Schweikert. I appreciate it. I know I have only 5
	minutes, so I want to, sort of, drive through this.
	Mr. Vedder. Congressman, there is a new history of the
	Federal Reserve written by a very distinguished scholar, Allan
	Meltzer of Carnegie Mellon University. It is up through the
	1980s or the 1990s. And it is not a complete history, but it is
	a second volume of a history. He is a very well-renowned
	monetary scholar. I haven't read the book entirely, but I sat
	in on a conversation with him and Chairman Volcker a couple of
	weeks ago at AEI, and it strikes me that it would be a very
	instructive kind of work, as well.
	Mr. Schweikert. All right.
	Mr. Bivens. Just quickly, spanning the spectrum of
	ideology, ``A Monetary History of the United States,'' Milton
	Friedman and Anna Schwartz.
	Mr. Schweikert. Okay, which I actually have.
	Mr. Bivens. ``Secrets of the Temple'' by William Greider.
	What is that?
	Mr. Schweikert. No, go on.
	Mr. Bivens. And I would say an absolute classic and very
	readable, ``Manias, Panics, and Crashes'' by Charles
	Kindleberger, formerly of MIT.
	Mr. Schweikert. All right.
	Mr. Chairman, witnesses, when I see monetary expansion in
	the way--let's just take the most current case scenario. And,
	at the same time, I have been spending tremendous amounts of
	time reading about the GSEs and the overhang and the mortgages
	and all the nonperforming debt we have at so many different
	levels.
	Does this monetary policy end up creating a situation where
	we are not taking nonperforming assets and either writing them
	down or getting them off the books? And does this end up
	creating a huge overhang here that this monetization makes it
	so I can keep them on the books, basically sort of creating
	sort of a flat line?
	Mr. DiLorenzo. Yes, that is exactly what has to happen, the
	liquidation of all of those bad assets and those bad
	investments. Historically, that is how recessions end. The bust
	period, as I said earlier, of the boom-and-bust cycles that we
	have is really the recovery period where businesses become
	stronger on the way out, at the end of the recession.
	And the Fed seems to have been doing everything it can to
	delay that process of the liquidation of these bad assets. And
	I think that is a very bad idea.
	Mr. Vedder. I am going to defer an answer on this because--
	I think Tom is probably right, but I haven't studied the
	specifics of the nonperforming assets closely enough to make an
	informed--
	Mr. Schweikert. All right.
	Doctor?
	Mr. Bivens. I don't think it is--I think it is true that
	some writing down of bad assets is going to be part of a good
	recovery. I have to say, though, I think the Fed's actions by
	avoiding deflation, outright falling prices, is actually going
	to make people climbing out of their debt burdens over the next
	5 to 10 years easier.
	If you have a mortgage that is fixed at $150,000, and every
	other price in the economy starts plummeting around it, then
	all of a sudden your mortgage payment has just gotten a lot
	more onerous for you. And so I think, by avoiding deflation, it
	is actually going to make the debt overhang less of an
	impediment to recovery in the next 5 to 10 years.
	Mr. Schweikert. Okay.
	Mr. Chairman, how much time do I have?
	Chairman Paul. I think your time has expired.
	Mr. Schweikert. Oh. And I was just getting to the really
	good questions.
	Chairman Paul. If you hang around, you will get another 5
	minutes.
	Mr. Schweikert. All right. Thank you.
	Chairman Paul. I would like to yield 5 minutes now to
	Congressman Renacci from Ohio.
	Mr. Renacci. Thank you, Mr. Chairman.
	I have been a small-business owner for 28 years, and I
	actually created jobs at the age of 24 with very little money
	in the bank. But I did have the opportunity to have banks
	willing to lend me money and the opportunity to create over
	1,500 jobs in my career.
	I want to ask all three gentlemen on the panel whether they
	believe the new duties given to the Fed in the Dodd-Frank Wall
	Street Reform and Consumer Protection Act will have an effect
	on employment growth. Because I am a believer that the free-
	market system will create jobs. I am a little concerned about
	that. I wanted to hear all three of your opinions.
	Mr. DiLorenzo. The Fed has a publication that has a title
	something like, ``The Structure and Functions of the Federal
	Reserve.'' And it lists, I think, at least 30 or 40 different
	areas where it regulates different types of financial markets.
	And for those of you who are businesspeople, you know that
	there is a very big cost involved in that. As Professor Vedder
	mentioned about the Dodd-Frank bill, it is not a free lunch. It
	is very costly to banks to enforce the provisions of that bill,
	and they are going to pass on some of the costs to their
	customers.
	And so, expanding the prerogatives of the Fed is going to
	add more layers of regulation and make the banking business
	that much more costly. There may be benefits along, but it is
	going to make it more costly and more costly to consumers, as
	well, and more burdensome for businesspeople like yourself, in
	my view.
	Mr. Vedder. The cause of unemployment is too high a price
	for labor. When labor cost go up too much, employers hire fewer
	workers. It is the law of demand. It is very simple, not very
	complicated. I wrote a book about this, which a lot of people
	have praised to the skies. I thought it was the simplest
	concept in the world.
	Dodd-Frank, other things being equal, does not lower the
	cost of labor. If anything, it raises costs generally to
	employers, making it difficult to employ workers. So the net
	effect of a mechanism like Dodd-Frank is probably to reduce,
	rather than increase, employment and, thus, increase
	unemployment in the United States.
	Mr. Bivens. I would say quickly, it is going to have little
	effect on what happens to unemployment.
	I will make two distinctions here. One, I have been mostly
	talking about, sort of, monetary ease and interest rates and I
	think that the Fed has mostly gotten it right, at least in
	direction. It is true, I do think that the Fed and every other
	institution in the 2000s had too light a regulatory touch. And
	so I think booms and busts are caused by light regulatory
	touches.
	I think the way that Dodd-Frank empowers the Fed to
	actually provide some tighter regulation, I think that is going
	to be a good thing, reduce boom-and-bust cycles in the future.
	And so I think it is an improvement.
	Mr. Renacci. Thank you, Mr. Chairman. I yield back.
	Chairman Paul. I thank you.
	We will now go into a second round of questioning.
	I would like to address this question to Dr. Bivens. This
	has to do with the debt that we have and its relationship to
	monetary policy. Even the Chairman of the Fed, Chairman
	Bernanke, has indicated that he thinks debt and deficits are a
	problem and has admonished the Congress to get their budget
	under control.
	Do you have similar concerns? Is there a limit to how much
	debt we can have and how high these deficits should run? Or is
	that of no concern at all when we are in the midst of a
	recession?
	Mr. Bivens. I absolutely have concerns over, sort of, the
	long-run debt limits that are on the United States. And I think
	we should definitely move to, sort of, long-run, closer budget
	balance than is currently forecast.
	I will say, it is not a concern of mine over the next, say,
	2 years. To me, what the economy needs now is spending power,
	support from both the fiscal and monetary side. Some moving in
	the next couple of years to radically reduce deficits and debt
	would be very counterproductive.
	But, absolutely, in longer-run periods, as unemployment
	returns to a tolerable level, that should absolutely be a
	concern.
	Chairman Paul. Thank you.
	I would like to suggest to Dr. DiLorenzo and Dr. Vedder
	that there is a connection between monetary policy and
	deficits. Because if we didn't have the facilitator there, the
	ability of the Fed to buy debt and manipulate interest rates,
	wouldn't there be a self-mechanism where Congress would
	literally be unable to spend the money because interest rates
	would go up? And interest rates--of course nobody wants them
	high and they are bad politics, but wouldn't that be a way of
	holding a check on government?
	And, really, it isn't just the Congress; it is the fact
	that the monetary system there accommodates the Congress
	because there is a lot of bipartisanship in the Congress.
	Sometimes, there are big-government conservatives who like to
	spend money, and sometimes, there are big-government liberals
	who like to spend money, and there is too much bipartisanship.
	They get together and they spend this money. And they figure,
	if we can get away with it, we are just going to allow the Fed
	to monetize this.
	And, for a long time, they can get away with it. And they
	have done this, especially since 1971, until they finally got
	this huge bubble that finally burst, and we are in the midst of
	this great recession. For those who are employed, it is a
	depression.
	But do you agree with that connection, that the Fed has
	something to do with encouraging the Fed to act irresponsibly?
	Mr. DiLorenzo. I would. I think you hit the nail on the
	head. I would agree completely with that.
	And, of course, when the Fed gets involved, it reduces the
	perceived cost of government. If you raise taxes to pay for
	government services, it is much more explicit and hits you in
	the face; you get a bill. But when the Fed prints money and
	expands the money supply, it has what economists call a
	``fiscal illusion effect.'' And it makes it that much easier
	for this bipartisanship to occur that you referred to.
	Chairman Paul. Dr. Vedder?
	Mr. Vedder. I agree with Dr. DiLorenzo and with your
	analysis, Dr. Paul. And, indeed, in my statement, I was worried
	I was talking a little bit too much about fiscal policy and
	debt, but I was doing it for exactly the reasons you indicated.
	I think there is a real connection.
	And throughout the history of the Fed, even going back
	before 1951, when the Fed was tied into the Treasury to keep
	interest rates down during the war, the Fed just keeping buying
	bonds and so forth. It was a deliberate policy to help the
	government manage its fiscal affairs. The Fed accommodated it
	by monetizing a lot of the debt.
	This has been going on and on and on. And it will go on as
	long as Congressmen have to be re-elected every 2 years and as
	long as the Fed has some connection to the Federal Government.
	It is inevitable that it will go on.
	Chairman Paul. Thank you.
	This is a question for Dr. Bivens. This has to do with a
	reference to what Dr. Vedder said earlier. He said that part of
	the reason we go into recessions is because labor costs get too
	high. Of course, nobody likes to hear that.
	But if this is true--and I believe Keynes spoke to this at
	one time, because labor costs get too high, but you can't go
	and, say, cut your labor. You can't cut nominal costs. But he
	argued that real costs could go down by inflation. And you
	raise it and you lower the value of the dollar, so real cost
	goes down. And that helps you get out of the recession.
	Do you buy into that argument? Or how would you look at
	that, on the need to get labor costs down?
	Mr. Bivens. I actually don't buy into that argument.
	The way I read Keynes is, sort of, as follows: that the
	first shot fired against his idea, that the way to fight
	recessions is to try to have the Fed and to have fiscal
	policymakers add more support to the economy, the first shot
	was, no, no, you just need to get the price of labor down. And
	he said basically, one, it is hard to get the price of labor
	down, even if all workers in the economy said, ``Yes, we all
	agree to a 10 percent wage cut today, cut our wages,'' all that
	would do is lead to a 10 percent fall in prices, as well. So
	the real wage actually would not fall much. It is actually very
	hard--
	Chairman Paul. Wouldn't that be good? Wouldn't that be
	good, to see prices come down?
	Mr. Bivens. No, because--
	Chairman Paul. It would help the consumer.
	Mr. Bivens. I am sorry?
	Chairman Paul. It would help the consumer, with prices
	going--what is so bad about prices going down?
	Mr. Bivens. Because their wages went down the exact same
	amount, and so their purchasing power has not changed at all.
	Chairman Paul. Yes, but--
	Mr. Bivens. What you would do is you would make the value
	of their debt more onerous. Basically, by increasing the value
	of debt, again, you have a $150,000 fixed mortgage and all of a
	sudden your wage is 10 percent lower, all of a sudden you are
	more constrained by your nominal debt payments. And that will
	make the economy worse.
	And so, Keynes is pretty clear, wage-cutting is absolutely
	not the way to get out of a recession.
	Chairman Paul. Okay.
	I now will yield 5 minutes to Congressman Clay.
	Mr. Clay. Thank you, Mr. Chairman.
	And, Dr. Bivens, we were told by Dr. Vedder that private
	markets handled mortgages and other lending for generations
	successfully without Federal intervention. Again, the data
	shows otherwise.
	According to the Congressional Research Service, during the
	years 1920 through 1945, the last period of time when the
	Federal Government had a very small role in homeownership,
	rates were only between 40 and 50 percent of homeownership
	nationally. Now that rate, at a time when the Federal
	Government is supposedly inappropriately involved, is 67
	percent. The homeownership rate was even higher within the last
	few years, as high as 69 percent.
	So I don't see how the numbers back up these claims about
	supposed excessive, expansionary policies on home lending. Can
	you help explain this error?
	Mr. Bivens. I think my assessment, sort of, agrees with
	yours, that I think the government support of homeownership
	played a key role in having that increase a lot in the post-war
	era. I am willing to quibble a bit that maybe some of the
	homeownership rates we saw in 2006, 2007 were bubble-inflated.
	But the trend is clear as day: With the introduction of Fannie
	and Freddie, with government support for homeownership, those
	rates rose pretty quickly.
	Mr. Clay. Thank you for that response.
	Do you think there is value in having the Fed maintain a
	dual mandate for monetary policy?
	Mr. Bivens. I do, and especially if the alternative is to
	drop the full employment mandate. I think that would be a
	disaster.
	To my mind, if there is a criticism of the Fed over a
	longer run, the last 30 years, it is that they have actually
	allowed that part of their dual mandate, the full employment
	part of it, to sort of go by the wayside and focused
	excessively on the price stability part.
	And so, a Fed that actually took that dual mandate
	seriously, I think, would be a very good thing.
	Mr. Clay. Do you think that if the Fed were operating with
	a single price stability mandate, that its execution of
	monetary policy since the onset of the financial crisis of
	September of 2008 would have been materially different or would
	have led to significantly different outcomes in the economy?
	Mr. Bivens. It is a good question. I think where that
	single mandate of price stability would really be a bad thing
	is during expansions.
	The irony here is that most people think the Fed have
	something like a 1 to 2 percent inflation target, seems to be--
	they are pretty consistently missing that, on the low side,
	these days. Inflation rates are coming in well below 1 percent.
	So even if they only had a commitment to 1\1/2\ percent
	inflation--forget the employment side--if that was their only
	commitment, they should still loosen. And so that is how bad
	the economy is today. Even if all they had was a pretty
	conservative price target, they should still be providing all
	the support they are and maybe even a little more.
	Mr. Clay. Thank you for that response.
	And, Mr. Chairman, I yield back the balance of my time.
	Chairman Paul. Thank you.
	I now yield 5 minutes to Mr. Huizenga from Michigan.
	Mr. Huizenga. Thank you, Mr. Chairman. I appreciate that.
	And my colleague from Missouri just, actually, started
	going down a road that I wanted to explore a little bit.
	Dr. Vedder, from the historical perspective, I think it
	would be helpful to have a very brief explanation about the
	dual mandate. How long has it been in place? Why was it really
	implemented?
	And then, moving on to all three of you, is the dual
	mandate a proper mandate? I think Dr. Bivens was starting to
	talk a little bit about that, but I would like to hear the
	remainder of the panel's views on that.
	Mr. Vedder. The dual mandate--when I think of the history
	of this, I think first of the Employment Act of 1946, where the
	government committed itself to a policy of encouraging full
	employment. And even in that bill, price stability was
	mentioned, and it was part of the so-called mandate. Again, it
	was more a statement of intent rather than a prescriptive
	statement.
	The Humphrey-Hawkins bill, which I think was, what, 1977 or
	something like that, was a more explicit widening of that
	mandate and made much more explicit.
	And all of this precedes, sort of--there was almost
	implicit in some of this, a lot of this, as relates to what we
	might call the ``Phillips curve'' idea, that if you have price
	stability--can you have price stability and full employment?
	That is the empirical issue.
	We can have that discussion. I do not think that the
	manipulation of prices in the long run impacts on employment,
	period. I think it does in the short run. I have written a book
	which indicates it does. There is a Phillips curve in the short
	run sometimes, but in the long run--higher inflation, lower
	unemployment. But in the long run, I don't see that that
	relationship exists.
	Mr. DiLorenzo. In terms of the price stability, we have
	price indexes that go all the way back to the 1790s or even a
	few years before that. And the price level in 1913, when the
	Fed was created, was roughly the same as it was in 1790, with
	some ups and downs. But ever since the Fed was created, the
	price level is 22 times higher now. So when I hear the idea
	that the Fed has a mandate to stabilize prices, it is almost
	farcical.
	And I don't think, overall, it has done a very good job in
	stabilizing employment either. You can mandate that is the
	Fed's job, but I think, historically, it hasn't done a very
	good job in either one.
	Mr. Bivens. Yes, in regards to that, I will say that I
	would much rather have average economic growth and the
	frequency of duration of recessions we have had post-1914 than
	in the 150 years prior. Basically, some moderate rate of
	inflation is the price you pay for having economic growth and
	fighting recessions in a serious way.
	Again, to the degree that there has been a problem with the
	dual mandate over the past 25, 30 years, it has been that one-
	half of it, the full employment commitment, has really been
	sort of the neglected part.
	Mr. Huizenga. So if I am hearing you, Dr. Bivens, you want
	to see the dual mandate remain, correct?
	Mr. Bivens. Yes.
	Mr. Huizenga. Okay.
	And I guess, the other two panelists, do you believe it is
	appropriate for that language to remain in there as goals and
	objectives? Dr. Vedder and Dr. DiLorenzo?
	Mr. Vedder. I think we ought to repeal the Humphrey-Hawkins
	Act, period, just do away with it.
	Mr. DiLorenzo. I agree with that. We have mentioned
	Christina Romer several times. One of her academic articles
	revises some data and shows that the business cycle was
	actually not more unstable in the pre-Fed era in the 19th
	Century than it was after the pre-Fed era. So you can't even
	make the case anymore, according to Christina Romer's research,
	that the Fed has done anything to stabilize the business cycle
	compared to the bad system we had, the admittedly bad, flawed
	system we had before the Fed came into being.
	Mr. Huizenga. Dr. Bivens, do you care to address Humphrey-
	Hawkins at all or any of the other points?
	Mr. Bivens. First, it was my understanding that Humphrey-
	Hawkins was actually no longer in effect. Am I wrong on that?
	Did it lapse in 2005 or 2006?
	Mr. Huizenga. I wasn't here.
	Mr. Bivens. Okay. Sorry. So I am not, you know--I think the
	dual mandate should absolutely be part of what the Fed is
	tasked to do.
	Mr. Huizenga. Okay.
	Thank you, Mr. Chairman. I yield back my time.
	Chairman Paul. Thank you.
	I now yield 5 minutes to Congresswoman Maloney from New
	York, who has joined us.
	Mrs. Maloney. Thank you so much, Mr. Chairman, for this
	hearing.
	And I thank all the panelists for their thoughtful
	testimony that they delivered to our offices.
	I would like to ask Dr. Vedder to comment on some of the
	facts that were raised in Dr. Bivens's testimony. In his
	testimony, he cited a study estimating that the $600 billion in
	Treasury asset purchases is likely to boost GDP by up to a full
	percentage point, which translates into roughly 1 million full-
	time jobs.
	That same study also stated that the full effect of all
	large-scale asset purchases undertaken by the Federal Reserve
	probably supported nearly 3 million jobs and will have lowered
	measured unemployment by 1.5 percentage points through the end
	of 2012. Other economists and researchers have supported this
	with similar studies and results.
	And so my question to Dr. Vedder is, isn't this solid
	research, solid evidence that sound monetary policy does help
	create jobs?
	Mr. Vedder. I haven't read the studies, to be honest,
	Congresswoman.
	But I will say this: Since the recession began in late
	2007, the Fed has followed the most expansionary monetary
	policy in, I think, its history in a situation like this. It
	has created a trillion dollars in excess reserves. It has done
	a whole variety of efforts and exertions to bail out companies
	and so forth in distress. And yet, we have fewer people working
	today than we did when this effort began. We have the worst
	employment record of any major downturn since the Great
	Depression.
	And so I can't see any positive association between Federal
	Reserve monetary policy and job creation based on the reading
	of the evidence in a period when we have a 9 percent
	unemployment rate and we have, what, 15 million--``X'' number
	of people out of work. It is kind of hard to get warm and fuzzy
	about the Fed's success rate with its monetary policy in recent
	times.
	Mrs. Maloney. May I ask unanimous consent to place this
	study in the record?
	Chairman Paul. Without objection, it is so ordered.
	Mrs. Maloney. And also to state that Christina Romer and
	others, other economists, including major economists, have
	testified that the economic shocks that our country has
	suffered are 3 times worse than the Great Depression. As the
	daughter of parents who suffered through the Great Depression,
	no matter how horrible this recession is or has been, it is
	nothing like what our country went through in the Great
	Depression.
	So I would like to ask Dr. Bivens, Dr. Vedder mentioned
	that he believes that there should be constitutional
	constraints placed on the Federal Reserve's authority. Can you
	comment on that? And do you agree?
	Mr. Bivens. First, I would just like to reiterate your
	point. It is bad out there in the U.S. economy; the great
	recession is really bad. The shock to the private sector that
	happened with the burst in the housing bubble is absolutely
	enormous. Like you say, researchers in many places say it was
	bigger than what led to, actually, the Great Depression. And I
	think it was the aggressive response of policymakers across-
	the-board that kept it from being so.
	In terms of constitutional limits on the Fed, I would like
	a lot more detail. If those limits would impede them from
	fighting future recessions as aggressively as they fought this
	one, I think that would be a very bad thing.
	I think it is one thing to say this has been the most
	aggressive response ever and we still have 9 percent
	unemployment. It is kind of like, imagine a town that is
	building a levee wall in response to a flood. You can say, ``It
	is the biggest levee we ever built, but the water keeps coming
	over it. We should stop. It is bigger than we have ever
	built.'' You have to build a wall as big as the shock.
	Mrs. Maloney. Okay. Thank you.
	Last week, Chairman Bernanke gave a speech at the National
	Press Club. I ask unanimous consent to place that speech in the
	record.
	Chairman Paul. Without objection, it is so ordered.
	Mrs. Maloney. And he stated that, although economic growth
	will probably increase this year, unemployment is expected to
	remain above and inflation below the levels that policymakers
	have judged to foster maximum employment and price stability.
	Since the Fed's rate has been near zero since December
	2008, the Fed has been using alternative tools to provide
	additional monetary accommodation. Specifically, the Fed has
	been purchasing longer-term securities on the open market, or
	in common speech it has been called quantitative easing. And
	the goal of this has been to put downward pressure directly on
	longer-term interest rates.
	Chairman Bernanke--and I want to ask the panelists if they
	could respond to whether or not they agree with his statement.
	He stated that, ``A wide range of market indicators supports
	the view that the Federal Reserve's securities purchases have
	been effective at easing financial conditions.''
	I would like the panel to comment on whether they agree or
	disagree. I think it is an important question.
	Mr. DiLorenzo. They have to have had an effect in some
	industries, of course, because wherever the money goes to
	first. But, obviously, it has had very little effect on overall
	unemployment, since the unemployment rate remains stuck around
	9 percent or more, depending on how it is measured.
	So, yes, it has had some effect on some industries. That is
	why the stock market is up, some of the big corporations have
	done well. But unemployment is not being very successful.
	Mrs. Maloney. Could you also comment on what would have
	happened if we had not engaged in quantitative easing with the
	Fed's fund rate close to zero? What would have happened?
	Mr. DiLorenzo. Since you are, sort of, looking at me, it is
	not a coincidence, I don't think, that we have had somewhat of
	an explosion in government at all levels--the Fed printing
	money, government spending, government debt, and we are stuck
	at 9 percent unemployment or more. Because all of this diverts
	resources in the direction of government-directed spending in
	resource allocation away from the entrepreneurs and the
	business owners and the consumers, who know a lot better what
	to do with that money than government bureaucrats and
	politicians do.
	And so I think we would be much worse off--as we said
	earlier before you came, Congresswoman, that we may be sowing
	the seeds of another bubble with all this quantitative easing.
	Mrs. Maloney. Dr. Bivens, would you comment briefly?
	Mr. Bivens. Yes, very briefly. If we had not done the
	quantitative easing, long-term interest rates would be higher,
	and we would have less business investment and consumer
	spending.
	And I would just note, business investment has performed
	very well for the past 5 or 6 quarters, growing at about 15
	percent at an annualized rate. So we would have less of that if
	we had not done the quantitative easing.
	Mrs. Maloney. My time has expired.
	Chairman Paul. Thank you.
	I now yield 5 minutes to Congressman Jones from North
	Carolina.
	Mr. Jones. Mr. Chairman, thank you again.
	And I again want to start with an e-mail from my district
	and then get to a question.
	This is Mr. Gordon Hansen from New Bern, North Carolina:
	``Thank you for requesting my opinion with regard to the
	Federal Reserve. My initial reaction to the Fed's policy to
	printing more money is, how is the Fed going to stop inflation?
	Since the beginning of this century, standard of living has
	decreased because fuel increased so rapidly, the middle-class
	wages could not keep up, and no one seems to notice or care.''
	This is America talking, quite frankly. And we have been
	elected by the people from all over this country to represent
	their feelings and their needs in Washington, D.C.
	I have great respect for each and every one of you. You are
	very learned men, much more than I.
	The frustration that I see back in my district and I feel
	is that, when I was born in 1943--and thank you for recognizing
	my birthday tomorrow--when I was born in 1943, this country was
	in war and coming out of war. This country impressed the world
	with its greatness after the war, of how we were in a position
	where we were creating things, we were manufacturing things.
	And that gets me to the point that I am one of the few
	Republicans--I am opposed to any trade agreement at this time.
	I am not adamantly opposed to trade agreements, but when you
	are in a deep recession, which everybody has acknowledged, why
	are we passing the Korean trade agreement so we can create
	70,000 jobs, I believe has been said. I am trying to verify
	that, by the way. I don't believe it.
	But the point is, this country is a debtor nation. Now, we
	can pump it up, from the Feds to everybody else can put money
	out here. But, as everybody is saying, the people understand
	what is happening. They fully understand what is happening.
	So my point is this. My State of North Carolina, from 1999
	until 2009, lost 376,000 manufacturing jobs. What would have
	happened, in your opinion--I have a two-part question--what
	would have happened, in your opinion, if we had not passed
	NAFTA, CAFTA, and all of these trade agreements that supposedly
	were going to create more jobs for the American people?
	I think greed is probably the most dangerous thing
	affecting America. Greed will destroy an individual, it will
	destroy a family, it will destroy a country. And my humble
	opinion is that greed has put America in this position, not
	only because of trade agreements.
	But, in your learned minds, give me an example of nations
	that at one time were economically strong and yet, because of
	some decision such as free trade, that these nations--and maybe
	it is not exactly the same comparison--but these nations, in my
	opinion--at one time, Spain ruled the world. At one time,
	France ruled the world. At one time, Rome ruled the world. At
	one time, America was the dominant power. Now it is China. And
	we are slaves to China. We owe them over $900 billion.
	From an economic standpoint, where do you see America? Are
	we at a point that America needs to understand that we cannot
	come back to be a strong power in the world? Are we at a point
	where, yes, we will have somewhat of a quality of lifestyle,
	but it is never going to go back, it is not even going to come
	close to going back to what it was?
	I don't think you can continue to sell yourself out to
	other nations and expect to be strong economically or
	militarily.
	Any response?
	Mr. DiLorenzo. Sir, the countries you mentioned, the
	Spanish empire and so forth, they essentially bankrupted
	themselves with empire. And, in my view, we are a long way down
	that road with our military empire all around the world, too.
	And so I think that is a contributing factor.
	And the only other thing I will say is, I am a free-market
	economist, but I opposed NAFTA at the time because when I first
	saw it, it was, like, a thousand pages of government
	regulations. And I didn't think it really constituted free
	trade at all, but government-managed trade. And I guess you
	would you have to do a careful study of how it has been managed
	over the past 15 years or so to really know its effects. But I
	wouldn't blame the problems on free trade, because I don't
	think NAFTA was a free-trade agreement, despite the words
	``free trade.''
	Mr. Jones. Thank you.
	Mr. Vedder. I more or less agree with Professor DiLorenzo.
	I do believe in free trade as a concept. I think most
	economists do. This is one thing economists of all persuasions
	more or less agree with, but we do put a lot of provisions in
	these bills that get far afield from the issue of trade. And I
	think that is a source of concern.
	As an economic historian, I would have to note that nations
	have rises and falls in the way people work and what they do.
	We had a rise in manufacturing in the 19th and early 20th
	centuries because of what us economists say, we had a
	comparative advantage in manufacturing. We have lost some of
	that comparative advantage today. Some of it has to do with
	government policies. Some of it has to do with other things
	that have nothing do with what the U.S. Government does.
	I don't personally worry too much about the loss of
	manufacturing jobs per se. What I worry about is the loss of
	jobs in totality, the productivity of labor in its totality,
	and so forth. And that is, I think, a broader concern.
	Mr. Bivens. You asked a very big question, so let me just
	try to be very brief.
	I think it is absolutely true that if we want different
	results, if we want living standards to continue to grow at a
	reasonable rate in the United States for the broad workforce,
	we better start doing lots of things differently. And one of
	those things we should do differently is our international
	economic policy.
	I am a little shocked to agree; I also did not like NAFTA.
	I think we need to think about exchange rates very differently.
	And so we better start doing things differently if we want to
	continue to grow.
	Mr. Jones. Thank you, Mr. Chairman.
	Chairman Paul. Thank you.
	I will yield 5 minutes now to Mr. Green from Texas.
	Mr. Green. Thank you, Mr. Chairman.
	Let's talk for just a moment about causal connections as
	opposed to coincidence. Last summer, when the American Recovery
	and Reinvestment Act was at its zenith, when it was providing
	maximum benefit, we also at that time saw the turnaround in
	terms of a recovery in the economy.
	Mr. Bivens, was that just coincidence or is there a causal
	connection?
	Mr. Bivens. I definitely believe there is a causal
	connection. Like you say, the Recovery Act was providing a sort
	of maximal boost to the U.S. economy at that point. There are a
	lot of estimates that said, without the support provided by the
	Recovery Act, we would have seen zero growth for about 3 or 4
	quarters even after the official recession ended.
	Mr. Green. Let's move now to the FDIC.
	Mr. DiLorenzo, do you, sir, believe that the FDIC serves a
	meaningful purpose with its ability to wind down banks that are
	failing?
	Mr. DiLorenzo. With its ability to close down banks?
	Mr. Green. That are failing. When they are failing, the
	FDIC moves in, usually on a Friday, they wind down the bank,
	and then on Monday there is a new bank that opens, perhaps
	under the same name, or a new name, but they do reopen, and
	they move the assets. And they have the ability to do this with
	a premium that is paid by banks so as not to interrupt the
	economy.
	Do you agree with this?
	Mr. DiLorenzo. I don't think we need a government
	institution to do that. That could be handled by the courts, I
	would think. But it is probably one of the least offensive
	things the FDIC--
	Mr. Green. You would not have the FDIC, you would have the
	courts deal with the banks and the runs that would be created
	on banks? You would have multiple banks, as was the case when
	we were starting the great recession, that were challenged, and
	you would just simply let all of these banks go into
	bankruptcy? Do you not see that by doing this we would have
	runs, greater runs on banks that would create greater stress on
	the economy?
	Mr. DiLorenzo. I am not sure--before we had an FDIC, I am
	not sure you could make the case that the bank runs were worse
	throughout history.
	Mr. Green. They were. Before we had the FDIC, we had the
	Great Depression.
	Mr. DiLorenzo. Yes, for a few short periods. But if you
	look at the long stretch of history, I don't think--you would
	have a much tougher time making that case.
	Mr. Green. I would say to you that a few short periods that
	devastate the economy to the extent that the Great Depression
	did is something that would not go unnoticed.
	Mr. Bivens, do you think the FDIC serves a meaningful
	purpose?
	Mr. Bivens. Absolutely, for the reasons you say. They make
	people secure in their deposits, and so you don't see the runs.
	Mr. Green. Mr. Vedder, do you think the FDIC serves a
	meaningful purpose?
	Mr. Vedder. I wrote my doctoral dissertation on the FDIC. I
	think, generally, it has been one of the more successful
	government agencies. I do think it needs, however--
	Mr. Green. Excuse me, since my time is limited. Thank you.
	Let me just follow up with this.
	Mr. Vedder. It needs--
	Mr. Green. You will get an opportunity.
	Let me follow up with this. Given that you think it serves
	a meaningful purpose--and I agree with you--let us then
	conclude something else. Do you think that we should be able to
	wind down these AIGs of the world when they can provide
	systemic risk to the economy? Or should they just be allowed to
	bring the economy down?
	The AIGs of the world--you are familiar with AIG?
	Mr. Vedder. What do you mean by ``wind them down?'' Why
	don't we let them go into bankruptcy? What is wrong with
	bankruptcy?
	Mr. Green. Why not let the banks go into bankruptcy? That
	is the point. You just said that the FDIC protects banks. If
	you are going to prevent banks from going into bankruptcy, why
	not try to salvage the economy and prevent the types of stress
	that can be caused by having these institutions that create
	systemic risk, by preventing them from just simply going into
	bankruptcy and creating all of these problems for us?
	The point I am making is, Dodd-Frank deals with that. If
	you don't like Dodd-Frank, then you don't like a means by which
	we deal with ``too-big-to-fail'' institutions. Most people
	think that we need to do something about these institutions
	that were labeled ``too-big-to-fail.'' Dodd-Frank addresses
	this. Dodd-Frank addresses other aspects.
	You mentioned credit cards. Do you think there ought to be
	something called universal default? A lot of consumers are
	sitting in here. Are you familiar with that term, ``universal
	default?''
	Mr. Vedder. I am familiar with the term, yes.
	Mr. Green. Are you familiar with it? Do you think we ought
	to have universal default?
	Mr. Vedder. I haven't--I don't have a position on that.
	Mr. Green. I do. I don't think consumers ought to be in a
	position such that, because they have problems in one place,
	credit card companies can simply decide, we are going to
	declare you in default with us because you had a problem
	someplace else, especially in this economy. Dodd-Frank deals
	with this.
	Mr. Vedder. Does it deal with Fannie Mae or Freddie Mac?
	Mr. Green. Now, let me ask you one more. I have one more
	for you. I believe you are a gold standard person. Is that a
	fair statement, based upon your comments and your writings?
	Mr. Vedder. I think the gold standard--we did well when we
	were on the gold standard.
	Mr. Green. And if we return to it, if we return to the gold
	standard, what would happen?
	Mr. Vedder. Pardon?
	Mr. Green. What would happen if we returned to the gold
	standard?
	Mr. Vedder. It would be very--the return to the gold
	standard is not--if we did it and if the world did it, I think
	we would be a better place. I think we would be a better place.
	But I don't see it happening in the short term.
	Mr. Green. Let's assume that you have made a prediction
	that we would be in a better place. Is that a fair statement?
	Mr. Vedder. Yes.
	Mr. Green. Now, what did you say about people who make
	predictions earlier?
	Mr. Vedder. Economists are lousy predictors.
	Mr. Green. What did you say about the people who make
	predictions?
	Mr. Vedder. So why are you sitting here listening to me,
	Congressman?
	Mr. Green. I am listening to you because you are here as a
	person who merits some attention, given that you are before
	Congress.
	Now, tell me, what did you say about people who make
	predictions?
	Mr. Vedder. What did I say?
	Mr. Green. Yes, sir. You don't recall?
	Mr. Vedder. I said that some people, some economists make
	bad predictions, and some of them make good predictions.
	Mr. Green. You had an ``F'' word that you used.
	Mr. Vedder. I did?
	Mr. Green. Yes.
	Mr. Vedder. I don't remember.
	Mr. Green. I do. You said they were foolish.
	Mr. Vedder. Foolish?
	Mr. Green. Yes, sir.
	Mr. Vedder. Oh, okay.
	Mr. Green. All right. Thank you for your prediction.
	Mr. Vedder. Okay.
	Mr. Green. I yield back.
	Chairman Paul. I yield myself 5 minutes for closing remarks
	and anybody else who wants to have another question.
	I do want to bring up the subject generally of QE2. There
	is a strong disagreement between those who object to it and Dr.
	Bivens, who thought that it really has helped a whole lot. And
	I don't think we will resolve that.
	But, that was part of the program of injecting $4 trillion
	into the economy, with the argument that it has done very, very
	little at all and, some of us believe, maybe harm in the long
	run. But the $4 trillion, actually we can argue that it did
	help prevent a depression for some people, mainly Wall Street
	and the big bankers and some corporations. They were able to
	benefit. And who came out on the short end? The people who lost
	their jobs and lost their houses and lost their mortgages. So
	the whole thing didn't work if you were trying to help the poor
	people. I think you were destroying the poor people while it
	was nothing more than corporate welfare--$4 trillion, and we
	have very little to show for it.
	But the question I want to address is, there is a little
	bit of talk--I don't think it is serious--about unwinding this.
	We bought up all the trash, all the worthless assets. And the
	taxpayers own this now, and it is on the books. We can't fully
	audit the Fed. We can't find out what they are doing. And now
	they are talking about, maybe we ought to unwind this. That is,
	we are going to sell that trash. Who is going to buy it? How do
	we do it? And when do we do it?
	Chairman Bernanke says it is not time yet, but he is really
	cocky about this. He knows when it is, and he is going to do
	it, and he is going to do it smoothly. And what did he say
	about problems coming? His anticipation, his whole idea that
	when a crisis comes and when there is a recession, I can take
	care of it, I know how to inject money in just unlimited
	amounts. And I tell you what, he did, unlimited amounts, the
	largest ever. And the jury may be still out on how bad a
	failure it is going to be, but the time will come.
	But the question is, what are we going to do about
	unwinding? Are they really serious? And what would that do to
	employment? If they did it now--they are not going to dare do
	it now, with unemployment rates, real unemployment rates up to
	22 percent, because it would do that horrible thing of raising
	interest rates. So that is not going to happen.
	What they are going to do is continue to look at the CPI.
	That is where Bernanke is going to get his signal. When the CPI
	goes up and we have price inflation, that is when we have to
	unwind.
	And he is so overconfident about this. You talk about
	predictions and braggadocio, ``I can take care of it.'' Like,
	he didn't know it was coming, he would take care of it if it
	came, and now he says, ``I know exactly when to turn it off.''
	I just think that is such dangerous talk.
	By looking at the CPI, what does he do? He takes the CPI,
	he excludes food and energy, and says, gee, CPI isn't going up,
	and he has price stability. There is no more price stability in
	this country when you look at what happens to the bond prices
	and the housing prices and commodity prices. There is nothing.
	What is this stuff about unwinding?
	I would like a comment from each one of you on what is
	going to happen, or if it happens, and what are the abilities
	of truly unwinding this and really saving us from a calamity?
	First, Dr. DiLorenzo.
	Mr. DiLorenzo. Congressman, what you just said reminds me
	of what Friedrich Hayek won the Nobel Prize for in 1974. It is
	summarized in a book of his called, ``The Fatal Conceit.'' And
	it is essentially a critique of this whole idea that one man or
	one group or one committee could, sort of, essentially plan an
	economy, whether it is by manipulating interest rates or the
	price level or whatever else. And I see no reason why we
	Americans are better at central planning today than the
	Russians were in the 20th Century.
	That is basically the mindset that you are talking about
	when you are talking about Chairman Bernanke claiming to be
	able to manipulate the economy in these ways. I don't see any
	way out. If he had a smooth exit strategy, I assume he would be
	taking it right now. And so I see nothing but bad things that
	could possibly happen from winding down, as you say.
	Chairman Paul. Dr. Vedder?
	Mr. Vedder. To me, the supreme irony of all of what you
	just said and what Professor DiLorenzo said is, why was the Fed
	created in the first place? I think if you read the history of
	the period, after the panic of 1907--the panic of 1907, there
	was no central bank. And so, what happened were a bunch of
	private bankers, led by J.P. Morgan, sort of organized an ad
	hoc committee to sort of save banks and prevent them from
	failing. And by the way, it achieved some success in doing
	that.
	But afterwards, people said we can't have a single
	individual serve as sort of the guru to save our economy, like
	J.P. Morgan. We have to create a central bank and decentralize
	it into 12 banks and all, to keep the power diffuse.
	And we moved away from that diffusion of power back to the
	centralization of power. Now it is Bernanke. At least J.P.
	Morgan had some skin in the game. He had some money in the
	game. When the banks failed, he failed. What does Bernanke have
	in the game? He gets his salary anyway and then goes off to
	work for Goldman Sachs.
	So I think that is it. And I have no idea how it is going
	to be unwound. Because it is an historically unprecedented
	situation, I can't predict. But I am uneasy. And that is why
	markets are uneasy. And that is why prices--that is why we have
	the problems we have. That is why bond prices are starting to
	go up. That is why Moody's is starting to say, should we give
	AAA bond rating to the U.S. Government securities? Things like
	that. People are getting uneasy.
	Chairman Paul. Maybe Dr. Bivens will be more optimistic.
	Mr. Bivens. Slightly, yes. It is not a trivial challenge
	about how this is all going to be unwound. But I will say just
	two things quickly.
	One, it is going to actually feel like a luxurious decision
	if we can start unwinding this and the unemployment rate is
	much lower. And so, to my mind, the proper focus now is on
	providing maximal support to job growth in the economy, not
	worrying so much about how this is unwound.
	And two, I have to say, I am sure there will be mistakes
	made as we do it. I am sure there will be some targets missed.
	But he has actually--Ben Bernanke and the rest of the Fed has
	laid out a strategy for how this will be unwound. They have
	talked about the instruments they are going to use, the levers.
	Is it going to work perfectly? Are they going to hit forecasts
	to the decimal point? Absolutely not. But, to my mind, the fact
	that they are focused much more on support and job growth in
	the near term says very good things about what they are doing.
	Chairman Paul. Thank you.
	Mr. Clay, I yield to you for another 5 minutes. Or Mr.
	Green.
	Mr. Clay. Mr. Chairman, I will yield to Mr. Green.
	Mr. Green. Thank you, Mr. Chairman. And I thank the ranking
	member, as well.
	I would close by reminding us that we have seen, I am sure
	many of you, the movie, ``Back to the Future.'' Based upon what
	I have heard today, there are some who would take us ``forward
	to the past''--back to the past, or forward to the past, when
	we didn't have a Fed, when we didn't have FDIC, when we did not
	have VA, when we did not have many of the institutions that
	have helped people move into the middle class. Home ownership,
	30-year mortgages--these things have made a difference in the
	lives of the American people.
	And I would caution us, before we make decisions to
	eliminate institutions that have served us well, perhaps we
	should consider the unintended consequences of such a massive
	decision. And I think we ought to proceed with a great degree
	of caution when we say things like, we can live without the
	Fed, without the FDIC. I am indicating VA; no one said it. But
	when you are on this track, it appears to me that you may be
	talking about the VA, as well.
	Many of these institutions have served a good many middle-
	class people well, and we ought to move with caution.
	I thank you for the time, and I yield back.
	Chairman Paul. The hearing is adjourned.
	[Whereupon, at 12:15 p.m., the hearing was adjourned.]
	A P P E N D I X



	February 9, 2011

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