[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
PROMOTING ECONOMIC RECOVERY AND
JOB CREATION: THE ROAD FORWARD
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
JANUARY 26, 2011
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-1
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
C O N T E N T S
----------
Page
Hearing held on:
January 26, 2011............................................. 1
Appendix:
January 26, 2011............................................. 61
WITNESSES
Wednesday, January 26, 2011
Brody, Kenneth D., Partner, Taconic Capital...................... 54
Bursky, Andrew M., Chairman, Atlas Holdings, LLC................. 52
Hoffman, Eric, Executive Vice President and Chief Operations
Officer, Hoffman Media, LLC.................................... 48
Kohn, Dr. Donald, Senior Fellow, The Brookings Institution....... 12
Maddy, H. Charles III, President and Chief Executive Officer,
Summit Financial Group......................................... 50
Poole, Dr. William, Senior Fellow, Cato Institute, and
Distinguished Scholar in Residence, Alfred Lerner College of
Business and Economics, University of Delaware................. 9
Scott, Hal S., Nomura Professor of International Financial
Systems, Harvard Law School.................................... 14
Taylor, John B., Mary and Robert Raymond Professor of Economics,
Stanford University............................................ 11
APPENDIX
Prepared statements:
Huizenga, Hon. Bill.......................................... 62
Brody, Kenneth D............................................. 64
Bursky, Andrew M............................................. 65
Hoffman, Eric................................................ 72
Kohn, Dr. Donald............................................. 76
Maddy, H. Charles III........................................ 88
Poole, Dr. William........................................... 95
Scott, Hal S................................................. 98
Taylor, John B............................................... 117
Additional Material Submitted for the Record
Bachus, Hon. Spencer:
Written statement of Associated Builders and Contractors
(ABC)...................................................... 123
Written statement of the Manufactured Housing Association for
Regulatory Reform (MHARR).................................. 125
Written statement of the National Association of Federal
Credit Unions (NAFCU)...................................... 146
Waters, Hon. Maxine:
Written statement of the Credit Union National Association
(CUNA)..................................................... 147
Written statement of the National Low Income Housing
Coalition (NLIHC).......................................... 148
PROMOTING ECONOMIC RECOVERY AND
JOB CREATION: THE ROAD FORWARD
----------
Wednesday, January 26, 2011
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the committee] presiding.
Members present: Representatives Bachus, Hensarling, Royce,
Lucas, Paul, Manzullo, Biggert, Miller of California, Capito,
Garrett, Neugebauer, McHenry, Campbell, Bachmann, McCotter,
Pearce, Posey, Fitzpatrick, Luetkemeyer, Huizenga, Duffy,
Hayworth, Renacci, Hurt, Dold, Schweikert, Grimm, Canseco,
Stivers; Waters, Maloney, Velazquez, Watt, Clay, McCarthy of
New York, Baca, Miller of North Carolina, Scott, Green,
Cleaver, Perlmutter, Donnelly, Carson, Himes, and Peters.
Chairman Bachus. This hearing of the Financial Services
Committee will come to order. Without objection, all members'
opening statements will be made a part of the record.
The gentleman from California, Mr. Royce, is recognized for
1 minute.
Mr. Royce. Thank you, Mr. Chairman. While the President
touted the strength of our economy last night, significant
obstacles stand between where we are today and real economic
growth. The housing market continues to sputter, small
businesses are burdened with a massive new health care law, and
there are real questions about addressing our national debt.
Firms are bracing for hundreds of new regulations coming from
Dodd-Frank.
Despite what some may say, repairing a fundamentally flawed
law does not add to the uncertainty in the market. Rather,
healthy capital markets require sound regulations. Dodd-Frank
failed in this endeavor. It is now up to us to correct the
mistakes of the past, truly end ``too-big-to-fail,'' wind down
the GSEs, and ensure safety and soundness regulation is the
primary focus throughout our regulatory structure.
I yield back, Mr. Chairman.
Chairman Bachus. Thank you. Ms. Waters is recognized for 4
minutes.
Ms. Waters. Thank you very much, Mr. Chairman. As you know,
Barney Frank, our ranking member, is not here this morning.
I want to thank you for holding this hearing on ``Promoting
Economic Recovery and Job Creation: The Road Forward.'' While
the economy has shown some signs of recovery, it is clear that
more aggressive action is needed from Congress in order to put
our country back on the right track. In spite of a slight
decrease, unemployment remains unacceptably high. At 9.4
percent, the economy shows no sign of regaining the 8.45
million jobs that have been lost since 2008, and foreclosures
will be 20 percent higher in 2011.
The Federal Reserve has acted because Congress failed to
provide an adequately large stimulus given the magnitude of
this crisis. The Fed's recently implemented qualitative easing
policy is consistent with the Fed's dual mandate of fostering
maximum unemployment and stabilizing prices. It is clear to me
that since interest rates can can't get much lower, buying
long-term securities is one of a handful of options left to the
Fed to stimulate the economy.
While reasonable people can have differing opinions about
the manner in which the Fed has chosen to stimulate the
economy, ending the Fed's dual mandate to both reduce
unemployment and keep inflation low, as some on the other side
of the aisle have suggested, is not the answer.
I think what we must remember and what has been lost on
some of my colleagues on the other side of the aisle is that
this unemployment is a result of the financial crisis of 2008.
This crisis, which represents the biggest challenge to the
Nation's economy since the Great Depression, led to less credit
for small businesses, prospective home buyers, and other groups
who traditionally drive local economies. While they played no
role in creating this crisis, they, like everyone else, are now
suffering the consequences of the systemic risk caused by the
risky behavior of a few reckless institutions, behavior which
culminated in a bailout of Wall Street. The logical response to
this systemic collapse of the financial market was for Congress
to fill in the regulatory gaps so that this never happens
again.
The Dodd-Frank Act reforms the derivatives market,
establishes a Financial Stability Oversight Council to monitor
for systemic risk, bans proprietary trading, and makes other
fundamental changes to a financial industry that we can't
afford to bail out again.
Unfortunately, instead of focusing on solutions to create
jobs, today's hearing seems to be aimed at criticizing the Fed
for acting in a manner consistent with this dual mandate and
criticizing the legislation that will prevent another bailout.
I am interested in working on solutions to create more jobs.
However, I believe we must protect the reforms in Dodd-Frank
because by preventing another bailout we are preventing another
financial collapse that will result in the loss of millions
more jobs.
Thank you, Mr. Chairman, and I yield back the balance of my
time.
Chairman Bachus. Thank you, Ms. Waters.
Let me explain to the witnesses and the audience that we
are having 10 minutes on each side; we have restricted the time
for opening statements because we want to hear from our
witnesses. Mrs. Capito and I have both surrendered our time to
allow some of our other members to make statements.
At this time, I recognize Mr. Hensarling for 1 minute.
Mr. Hensarling. Thank you, Mr. Chairman. Last night in the
State of the Union Address, the President said, ``To reduce
barriers to growth in investment, I have ordered a review of
government regulations. When we find rules that put an
unnecessary burden on business, we will fix them.''
Mr. Chairman, we found one. It is called Dodd-Frank.
Unfortunately, in the President's announcement he seems to
exempt from the ambit of regulatory review both Dodd-Frank and
ObamaCare, which if you talk to any job creators in our Nation
is about 90 percent of the challenge that they face. Whether it
be fiscal policy, monetary policy, or regulatory policy, too
many job creators in America feel they are either facing
uncertainty or they are facing hostility. It is one of the
reasons that, unfortunately, under this President's
Administration, with the exception of 2 or 3 months,
unemployment has hovered around 10 percent.
I understand that Dodd-Frank is the law of the land. Not
all aspects of it are bad. But we were looking at no fewer than
243 new formal rulemakings--and, by the way, there is even
uncertainty about how many rulemakings. It will be the job of
this committee to ensure that although the rulemaking is
approached deliberatively, it is better to get it right than to
do it quick.
With that, Mr. Chairman, I yield back.
Chairman Bachus. Thank you, Mr. Hensarling.
Mr. Baca is recognized for 2 minutes.
Mr. Baca. Thank you very much, Mr. Chairman. We all heard
the President last night state that the future is ours to win--
and that means that we all need to work together and create
jobs. That is why I am looking forward to this session, and I
hope that my colleagues in this committee are committed to
working in a bipartisan fashion over the next 2 years, and that
is important for us if we are to progress and go forward.
We have a lot of work to do. The American people are still
not satisfied with the state of our economy. Unemployment is
still at an unacceptable level, and in my district it is about
14 percent. We still are one of the highest in foreclosure.
Middle-class families are still dealing with the harsh reality
of not being able to make their mortgage payments. Over the
last 2 years, I believe this body and the Administration has
made some progress, but our work is far from being done.
I hope that we will be able to analyze--and I state
analyze--the positive actions we took over the last 2 years and
see how we can build on it. I think that is important for us in
this committee, to find out how we can build on it.
With that, Mr. Chairman, I yield back the balance of my
time and I look forward to this hearing.
Chairman Bachus. Thank you. Mr. Paul is recognized for 1
minute.
Dr. Paul. Thank you, Mr. Chairman. I appreciate you holding
these hearings because the subject of unemployment certainly is
one issue on which everybody in the Congress agrees. We are
worried about it. We need more jobs. Democrats, Republicans,
everybody wants to do something with it. But the big problem
seems to be that everybody has a different answer. Some people
want to increase the spending. Others want to decrease the
spending. Some people want to increase taxes. Other people want
to decrease taxes. Then it comes to some saying there are not
enough regulations and some saying there is too much
regulation. Some people think we can print our way out of it,
and that is where the problem comes from.
But I think the problem really is that we fail to ask the
right questions. Why do we have unemployment? It might have to
do with the fact that we have a recession. Why do we have a
recession? We can't have recessions unless we understand that
there has been a boom period and there is a cycle. So it is
really dealing with the business cycle, why we have boom times,
and what we do about that. Rather than just dealing with the
symptom, I think we have to look at the overall cause of why we
have these boom periods and then we have the inevitable
corrections. And that brings us unemployment.
So by tinkering around the edges and saying that we can
change taxes or that regulations will solve our problem, I
think we will be missing the boat.
I yield back.
Chairman Bachus. Thank you. Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman. Thank you for
holding today's hearing. Nearly 1 year ago in his State of the
Union Address, President Obama said jobs must be the number one
focus in 2010. Sadly for businesses, for the last 2 years
Washington leaders set aside the jobs agenda and instead chose
the path of uncertainty. Last night we heard the President
again offering a number of encouraging words about the need to
focus on job creation, but I have to say I am skeptical of the
rhetoric.
The President also called for review and reform of Federal
rules and regulations that stifle job growth. Meanwhile,
according to the Wall Street Journal last week, ``Business
leaders say an explosion in new regulations stemming from the
President's health care and financial regulatory overhaul has,
along with a sluggish economy, made them reluctant to spend on
expanding and hiring. Companies are sitting on nearly $2
trillion in cash and liquid assets, the most since World War
II.''
Authorized by the Dodd-Frank Act, Federal agencies and
bureaucrats are lining up to issue to businesses across the
country new and costly rules, regulations, and data collecting
requests. It is fueling uncertainty; it is stifling job growth;
and where are the jobs? To create jobs, the Administration
needs to get serious about finalizing trade agreements,
reforming the Tax Code, and fostering regulatory certainty for
business so they can invest, expand, and grow.
I yield back.
Chairman Bachus. Thank you.
Mr. Garrett, for 1 minute.
Mr. Garrett. Thank you, Mr. Chairman. The issue of
potential systemic risk has been something that this committee
has been looking at now for the last couple of years, and I
have said throughout that entire time that if you think about
it, the most critical and obvious systemic risk that faces our
economy really is our massive national debt that hangs over all
of us and our future generations as well. So addressing that
risk, we can do so by reducing the size and scope of the
Federal Government is, of course, job one, as has been said.
One of the primary benefits of doing so, of course, will be to
help the economy start growing again.
But beyond that, beyond addressing the budget and spending
crisis facing our country, those of us here in this committee
have the opportunity to remove and review regulations, just as
the President said, those outdated regulations that stifle job
creation and make our economy less effective.
But as Jeb has pointed out, the President tends to exempt
some new regulations called for under Dodd-Frank as well as
those independent agencies. At least one of those agencies,
however, is doing the right thing, and that is the SEC. Under
the leadership of Mary Schapiro, she intends to proceed as if
they are subject to the President's order. So I look forward to
working with her and with the SEC and with other agencies that
continue to do what the President has asked for to eliminate
those unnecessary regulations of all variety to help incent job
creation and get our economy back on the move.
Chairman Bachus. Thank you, Mr. Garrett.
Mr. Scott, for 2 minutes.
Mr. Scott of Georgia. Thank you, Mr. Chairman. Jobs is
certainly the priority of our Nation. There are currently 14.5
million Americans out of work. Currently, the national
unemployment rate stands at 9.4 percent. And in my home State
of Georgia, the unemployment rate is a staggering 10.2 percent,
with over 500,000 Georgians unemployed. Our country did see a
modest gain in economic recovery in 2010, but unemployment
remained high. An estimated 7 million Americans, referred to as
``99ers,'' exhausted all unemployment benefits, and 16.7
percent of workers either could not find a job or have simply
given up looking for work.
However, despite these discouraging numbers, our job market
is showing some signs of improvements. The progress is, in
part, due to the policies guided by this very Financial
Services Committee in the last Congress. Economic experts are
anticipating faster growth in 2011, with more firms expressing
positive hiring plans than in over a decade. A recent survey
from the National Association for Business Economics found that
82 percent of the economists expected the Nation's economy to
grow by 2 to 4 percent in 2011. These are promising sentiments,
and along with my colleagues on this committee, I look forward
to taking advantage of every single opportunity to further
increase economic growth in the 112th Congress.
We must make sure that the United States has the most
competitive and innovative workforce and economy in the world.
This is the only way that the American people will be able to
face the future with confidence and with boldness the way we
need to.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you. Mr. Pearce. Mr. McHenry is not
here.
Mr. Pearce. When we are talking about jobs, we ought to
take just a second to ask, what does it take to create a job?
Bill Sweatt over in Artesia, New Mexico, said it best: ``It
takes me $340,000to create a job. I run bulldozers.'' He said
that is what a new bulldozer costs. Any time we tax away his
capital, then we take away his right to create a job; any time
we create regulatory uncertainty where he is afraid to invest
in that bulldozer, we kill a job. We have systematically killed
jobs in the timber industry, we have killed jobs in the oil and
gas industry, we have killed jobs in the mining industry, and
we wonder why we are at 9.5 employment. It is a specious
question that we are asking.
We know what is wrong with the economy. We know where the
jobs are. We are not willing to take the steps that are there.
I do not think that we can cut spending enough to create the
solutions to our economy. We must rebuild our jobs. Let's put
the capital to give them certainty and give them tax advantages
and they will begin to invest again. That is what it will take
to create jobs.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you, Mr. Pearce.
Mr. Watt, for 2 minutes.
Mr. Watt. Thank you, Mr. Chairman. If I thought this
hearing was really about jobs and job creation, I wouldn't be
so worried. What I am really concerned about is the content of
some of these witness statements, which really get us into
exactly this issue of the independence of the Federal Reserve
and the appropriateness of the Federal Reserve's dual mandate.
So I am kind of like President Reagan. Here we go. We have
had this debate. If we are going to have a Fed, we need to
allow it to be an independent Fed. If we want to go at whether
the Fed should exist or not, then we can have that debate in
Mr. Paul's subcommittee. But to do it under the guise of
talking about creation of jobs, I think, is just disingenuous.
We are here politicizing the Fed. We are going at their
independent status, and that is a debate that we ought to have
in a clear-cut, unadulterated manner. If you don't want the
Fed, then come on and say you don't want the Fed. But don't
come in and try to impact its independence circuitously by
going at the mandate it has. We gave them that mandate and we
gave them the independence to exercise that mandate. And if we
want to take it back, we ought to do it directly rather than
trying to do it by chipping away and talking as if we are
talking about creating jobs or not creating jobs.
Everybody wants to create jobs. I don't think this hearing
is about creating jobs. It is about the independence of the Fed
and whether we are going to politicize the decisions that they
are making.
I yield back, Mr. Chairman.
Chairman Bachus. Thank you, Mr. Watt.
Mr. Fitzpatrick for 30 seconds. All the other remaining
opening statements will be for 30 seconds.
Mr. Fitzpatrick. Thank you, Mr. Chairman.
It is entirely fitting and appropriate that at our first
hearing we discuss job creation and economic recovery, and I
appreciate the chairman's leadership on these issues. Americans
are hurting, and certainly my constituents in the Eighth
District of Pennsylvania are among them.
This committee is in a unique position to assist in our
country's economic recovery. It can be said that the financial
sector was one source of the great recession, but with
responsible rules and safeguards and leadership from this
committee, our Nation's markets will continue to lead the world
and be a source of American prosperity. We all look forward to
getting to work and listening to today's testimony.
Thank you, Mr. Chairman. I yield back.
Chairman Bachus. Thank you.
Mr. Huizenga.
Mr. Huizenga. In the interest of time, I have a longer
statement for the record that I would like to submit, if that
is all right with you. But I want to thank the chairman.
Chairman Bachus. This won't take away from his time, but
anyone who has an opening statement can submit it for the
record. We have already had an unanimous consent for that.
So we will start the time again.
Thank you.
Mr. Huizenga. Thank you, Mr. Chairman. I appreciate the
opportunity, and Ranking Member Frank, for holding this
important hearing today. I am a small business owner from
Michigan involved in real estate and construction trades, and I
can tell you that Michigan has been hit like no other State. I
see some heads nodding already.
In recent years, the unemployment rate has been well above
the national average. There are areas in my district in the
Second District in Michigan that I represent which actually
have seen the official unemployment rate double the national
average, and that is not including the hundreds of thousands in
Michigan who have stopped looking. We need to turn this around.
Last evening, we heard the President declare that the
actions of this Administration and Congress had ``broken the
back of this recession.'' I am not convinced that we are out of
the woods. I can tell you the people on the ground back in
Michigan don't believe that. And that is my main concern.
There are some small business principles that I live by and
run my businesses by. One, don't spend more than you take in. I
think, clearly, we are violating that. Two, do what is
necessary to create an atmosphere for success. I am concerned
that while well-meaning--as well-meaning as our current law is
here under Dodd-Frank, we don't achieve that goal through that.
Chairman Bachus. I thank the gentleman from Michigan.
Mr. Huizenga. Thank you, sir.
Chairman Bachus. Mr. Dold.
Mr. Dold. Thank you, Mr. Chairman.
I certainly want to take this opportunity to thank the
witnesses for joining us today, and we look forward to your
insight. What we are talking about today is jobs and the
economy, how do we improve those things. We must improve the
climate for business. I am a small business owner. I am a job
creator. And one thing that I can tell you is that back in my
district, the unemployment rate in certain areas is well above
20 percent.
We need to create an environment that allows businesses--
small businesses, medium-sized businesses, and large
businesses--to invest back in their businesses. Right now, they
are unwilling to do so because there is no certainty. We need
to create more of a certainty in terms of the environment and
cut down on the onerous regulations to make them more
competitive and even the playing field in a global marketplace.
So I look forward to your comments today, and I yield back.
Chairman Bachus. I thank the gentleman from Illinois.
At this time, Mr. Schweikert, the gentleman from Arizona.
Mr. Schweikert. Thank you, Mr. Chairman. I truly appreciate
you putting together this hearing. Being from Arizona, we are
basically foreclosure central. The devastation that I have seen
in my real estate market; the number of families who have been
just crushed by home prices, but also banking, Fannie Mae,
Freddie Mac, policy. And, Mr. Chairman, I truly hope you have
some real talent on this panel. If there is a moment where I
can also reach out to each of you because I have some very
technical and very specific questions I need some data on. I
would really appreciate that opportunity.
So, thank you, Mr. Chairman.
Chairman Bachus. I thank the gentleman from Arizona.
At this time, the gentleman from New York, Mr. Grimm.
Mr. Grimm. Thank you, Mr. Chairman. I would like to thank
you for calling this hearing on job creation. We all know it is
a top concern for America, and in just about every kitchen
table in Staten Island and Brooklyn, that is the number one
discussion.
What I would like to hear today is a discussion on how this
recent legislation is creating uncertainty for small
businesses. Specifically, I would like to discuss how Dodd-
Frank regulatory reform may affect the flow of credit to small
businesses that are looking to expand, create jobs, but they
are finding that their ability to do so and their access to
funds in a cost-effective way have been restricted.
With that, I yield back.
Chairman Bachus. I thank the gentleman from New York.
Our final opening statement will be from Mr. Stivers, the
gentleman from Ohio.
Mr. Stivers. Thank you, Mr. Chairman. I appreciate you
calling this hearing. Obviously, jobs is the number one issue.
In Ohio, where I am from, we have over 10 percent unemployment
in some parts. Obviously, jobs is the number one issue in Ohio,
and we have small business and business people sitting on
capital unwilling to invest in their businesses to create jobs.
And so I would like to hear today from the panel a little
information about the unintended consequences of our current
regulatory scheme, including Dodd-Frank, and how it is adding
to the uncertainty and keeping business from having access to
capital.
Thank you, Mr. Chairman. I look forward to hearing that.
I yield back.
Chairman Bachus. Thank you. I thank the gentleman.
At this time, I would like to introduce our very
distinguished first panel for today's hearing, which is
entitled, ``Promoting Economic Recovery and Job Creation: The
Road Forward'': Dr. William Poole, Distinguished Scholar in
Residence, Alfred Lerner College of Business and Economics at
the University of Delaware; Professor John B. Taylor, the Mary
and Robert Raymond Professor of Economics at Stanford
University; Dr. Donald Kohn, Senior Fellow at the Brookings
Institution; and Professor Hal S. Scott, Nomura Professor of
International Financial Systems at Harvard Law School.
We welcome your testimony, gentlemen. We will start with
Dr. Poole.
STATEMENT OF DR. WILLIAM POOLE, SENIOR FELLOW, CATO INSTITUTE,
AND DISTINGUISHED SCHOLAR IN RESIDENCE, ALFRED LERNER COLLEGE
OF BUSINESS AND ECONOMICS, UNIVERSITY OF DELAWARE
Mr. Poole. Mr. Chairman, and members of the committee, I am
very pleased to be here today to discuss issues with regard to
promoting economic recovery. The topic is obviously an enormous
one. But what aspect of Federal policy deserves to be at the
very top of the list of concerns? The Federal deficit is my
answer. However well the economy may perform this year, growth
over an extended period will require that the Federal budget be
put in order. There must be no higher priority.
Before I get to budget issues, a few brief comments on
regulation. There are scores of disquieting anecdotes
circulating about the depressing effects of regulation. One
that I heard recently from a friend concerned a company that
had for many years hired summer interns. Not this past summer,
however. Following an examination of the effects of the
Affordable Care Act and increasing insurance costs and risks,
the company decided to forego its usual summer intern program.
I find the anecdotes persuasive, but whether regulation adds up
to a significant impediment to growth is yet to be determined.
Now let me go to the very most serious issue, the budget.
Chairman Bachus. Excuse me, Professor.
Let's give respect to the witnesses. I know some of you all
are sort of talking and reacting, but let's try to have respect
and preserve our decorum.
Thank you.
Mr. Poole. The general public does not understand the
enormity of the budget challenge. The Congressional Budget
Office has said clearly that the current budget is not
sustainable. It is natural, and often appropriate, to view the
task of repairing a budget problem as involving some
combination of tax increases and spending cuts. It would be
useful if Congress would ask the CBO to clarify this issue by
projecting the tax rates that would be necessary to finance
spending in current policy projected over the next 30 years.
What will be immediately apparent, I believe, is that there are
no rates--no tax rates--consistent with the functioning of a
market economy that could finance the projected spending. If
tax increases cannot fix the budget problem, Congress will have
to cut outlays. Above all, Congress will have to scale back
entitlement spending. That means Social Security, Medicare, and
Medicaid. And I will be blunt: We cannot save Medicare in its
current form.
I emphasize that the issue is spending in current policy,
not spending in current law. As the CBO states in its important
study, long-term budget outlook, released this past August, the
Administration and Congress have systematically set current law
to understate likely outlays and overstate likely revenues.
This is a problem with the current Administration and prior
ones and is how the Nation, for example, ended up with the Bush
Administration tax cuts that expired at the end of 2010.
And here I will be blunt again: Current law budget
projections for future years have become so distorted that they
are hardly worth looking at. The problem of inaccurate and
distorted budget projections is especially acute with regard to
Medicare. The chief actuary said this in the appendix to the
Medicare Trustees Report released this past August. And this
will be a quote from the appendix: ``The financial projections
shown in this report for Medicare do not represent a reasonable
expectation for actual program operations in either the short
range as a result of unsustainable reductions in physician
payment rates, or the long range, because of the strong
likelihood that the statutory reductions and price updates for
most categories of Medicare provider services will not be
viable.''
Everyone agrees that tough decisions are needed but many
say not yet, because of the importance of nurturing the
recovery. I doubt that Federal spending is as important to
recovery as many believe. But suppose I accept that argument--
the argument that Congress should go slow in cutting spending.
Many things could and should be done now that would have a
minor effect on current spending, but a major long-run effect.
The President's Deficit Commission contains many useful
recommendations. Modifying Social Security to place the program
on a sound basis need not involve any changes to current
benefits or taxes. Following the Commission's recommendations
would demonstrate that the Federal Government can get serious
about fixing the budget problem.
There are scores of outlays and tax expenditures that ought
to be phased out. Along with many others, and probably a clear
majority of citizens, unfortunately, I have low expectations.
People are losing confidence in the Federal Government.
Something must be done to resolve the situation with Fannie Mae
and Freddie Mac. They should not be permitted to remain alive
on government life support. If Congress sets Fannie and Freddie
on a shrinking path, I am confident that private firms could
pick up the slack quickly.
For those who are less optimistic, a cautious plan is
feasible but would do the job. The two companies should stop
their purchase of new mortgages and permit their existing
mortgage portfolios to run off as homeowners pay down mortgages
in the normal course of business. The companies should announce
a gradual increase in securitization fees, which would create
room for private firms to enter the business over time. How can
Congress permit these two firms to survive? After all, with
their proven record of failure, costing taxpayers $150 billion
and counting, they are not shining success stories.
I began my study of economics using the justly renowned
textbook by Paul Samuelson. Early in the text is a subheading:
``The Law of Scarcity.'' Samuelson points out that, ``In the
world as it is, even children learn in growing up that `both'
is not an admissible answer to a choice of which one.'' When
will American voters and Congress learn that ``both'' is not an
admissible answer when it comes to Federal spending?
Thank you, Mr. Chairman.
[The prepared statement of Dr. Poole can be found on page
95 of the appendix.]
Chairman Bachus. Thank you, Dr. Poole.
Professor Taylor.
STATEMENT OF PROFESSOR JOHN B. TAYLOR, MARY AND ROBERT RAYMOND
PROFESSOR OF ECONOMICS, STANFORD UNIVERSITY
Mr. Taylor. Thank you, Mr. Chairman, and other members of
the committee. Thank you for inviting me to testify at this
important time.
It has been over 3 years since the crisis flared up and the
recession began and we still have unemployment well over 9
percent. It has been over 9 percent for 20 consecutive months.
In my view, many discretionary Federal interventions which
really deviated from basic economic principles were largely
responsible for the crisis with the slow growth and indeed for
the current high rate of unemployment. Many of these
interventions occurred before the panic in 2008, but they have
been doubled down in the last couple of years. When you look at
each of them, as I have tried to do, you find that they had
very little effect in stimulating the economy or affecting
unemployment.
The one-time payments to individuals did not jump start
consumption. The sending of grants to the States did not
increase infrastructure spending. The Cash-for-Clunkers program
merely moved spending a few months up. The purchases of
mortgages under Quantitative Easing II did not, in my view,
have a material impact on mortgage rates when other risks are
taken into account. So, at best, these actions had a small
temporary effect, which dissipated quickly with no lasting
effect on growth or job creation.
Indeed, the legacy is higher debt, monetary overhang, and
uncertainty about new regulations that have likely been a drag
on the economy. In my view, none of this should be surprising.
Basic economics says this would happen. But we have had this
painful experience over the last few years that seems to me
point very clearly to the need to restore sound fiscal policy,
restore sound monetary policy, in order to reduce unemployment
and create jobs.
In the fiscal area, I think it is very important to lay out
a plan, a long-term plan, to reduce spending and stop the
exploding debt. What I would like to see is a plan put together
fast enough that this summer the Congressional Budget Office
can make a projection, a long-term projection, that brings debt
down rather than exploding. On page 3 of my written testimony,
I have included a chart. It has the projections of CBO of the
debt to GDP ratio, the forecast they made last summer, the
forecast they made the summer before that. A plan should be
scored to reverse this disturbing explosion of the debt as soon
as possible, and I believe the uncertainty that would generate
would directly affect jobs.
Some say we should wait, postpone the reductions in
spending that are required. I don't see the evidence for that.
In fact, what I see--and I have included a chart in my
testimony on this as well on page 4--what I see is the
importance of private investment in creating jobs. It is just
an amazing correlation between this high unemployment rate and
the low level of private investment we have. There is no such
correlation with respect to government purchases or spending.
We really need to take that into account and address the real
problem.
But just as Congress and the President needs to lay out a
plan for reducing the debt, I think the Federal Reserve should
lay out a plan for reducing the size of its extraordinarily
large balance sheet. In addition, I think in order to generate
more predictable, certain policy, bolster the Fed's
independence in the monetary policy area, we should amend
section 2 of the Federal Reserve Act; amend it in a way that
clarifies the objectives of the Fed and restores reporting
requirements which were removed in 2000.
It would be better, in my view, for economic growth and job
creation if the Fed focused on the goal of long-run price
stability within a clear framework of economic stability. Such
a reform would not prevent the Fed from providing liquidity,
serving as lender of last resort, or cutting interest rates in
a financial crisis or a recession.
In addition, it seems to me the reporting requirements
could be amended. The Federal Reserve Act, I think, should
require the Fed to report its strategy that it plans to use for
setting interest rates in order to achieve this goal of price
stability. The Fed, of course, should establish its own
strategy. It shouldn't be dictated by the Congress. And the Fed
should have the discretion to deviate from the strategy in a
crisis or other unanticipated circumstances. However, if it
does deviate, it should and must report in writing and in a
public hearing the reasons for such deviations.
This requirement provides a degree of accountability that I
think is needed for an independent agency of government. I
think such a reform will reverse the short-term focus of policy
and help achieve strong growth and job creation now and in the
years ahead.
Thank you very much for the opportunity to testify. I am
happy to answer any questions.
[The prepared statement of Professor Taylor can be found on
page 117 of the appendix.]
Chairman Bachus. Thank you.
Dr. Kohn.
STATEMENT OF DR. DONALD KOHN, SENIOR FELLOW, THE BROOKINGS
INSTITUTION
Mr. Kohn. Thank you, Mr. Chairman. Mr. Chairman, members of
the committee, I appreciate this opportunity to address the
topic of promoting recovery and job creation. I can think of no
more important economic topic facing the Nation today, as many
of you have remarked.
A slow economic recovery is a predictable consequence of a
financial crisis that impairs lenders and destroys wealth. The
headwinds seem to be abating and many economists, myself
included, expect the pace of growth will pick up some this year
and the job market will improve somewhat. The natural healing
powers of a market economy are being complemented by very
accommodative monetary policy and by the boost to spending that
will come from the fiscal package the Congress and the
President agreed to in late 2010. To a considerable extent,
patience may be the most potent weapon we have now to promote
economic recovery and job creation. And if the economy follows
the expected path, that patience should extend to withdrawing
stimulus in the near term as well as trying to create new jobs
through major new initiatives. Patience on both sides is
required.
That said, I think there are few broad areas in which
policymakers can constructively contribute to faster recovery.
The challenge for monetary policy will be to promote expansion
without allowing fears of deflationary or inflationary spirals
to take hold. Longer-run inflation expectations must continue
to be well-anchored for economic performance to improve.
The Federal Reserve should continue to emphasize its
willingness to adjust its policy based on the changing outlook
for growth and inflation and its determination to return
consumer inflation to the range of 2 percent, or a little
below, that forms the central tendency of the FOMC members'
expectations for inflation over the longer run, and then to
keep it there. To keep inflation from rising above 2 percent,
the Federal Reserve will need to exit its extraordinary
policies in a timely way.
In the end, it will not be technical factors that determine
whether the Federal Reserve makes progress toward the
objectives it has been given. Rather, it will be judgment and,
critically, a continued high degree of independence from short-
term political pressures so that it can exercise that judgment,
and that will be what determines its success.
In fiscal policy, the lack of a clear and committed path to
fiscal and debt sustainability is an important source of
uncertainty for households and businesses and a risk to
stability in financial markets. As the recovery gathers
momentum, the public and private sectors will come increasingly
into competition for scarce saving, causing interest rates to
rise. The pressures on rates will be greatly intensified if the
investors come to doubt the willingness of the Congress and the
Administration to confront and make very difficult choices on
spending and taxes that are required. You must determine and
commit to a path to longer-run fiscal sustainability.
Regulatory policy, including uncertainty about regulations,
has probably been one of the factors holding back spending,
though in my view it is probably not one of the main factors.
To some extent, both greater regulation and uncertainty about
that regulation have been byproducts of efforts to achieve
important societal goals. That is certainly the case for
financial regulation. In the writing and implementation of
Dodd-Frank legislation, the near-term costs of greater
regulation--and there are costs--are being weighed against the
promise of a more stable and resilient financial system that
will be able to avoid the types of systemic problems that have
proven so disruptive and costly for jobs and incomes over the
past several years. Its net effect will depend importantly on
how it is implemented.
I believe that, on balance, the new legislation will make
our financial system stronger and more resilient to unexpected
developments, will reduce the moral hazard effects of ``too-
big-to-fail,'' and will increase transparency for better
monitoring by both supervisors and the private sector. I hope
that implementation of the legislation is not materially
slowed. In many cases, putting in place some rules, even if
they are adjusted later, will do more to relieve uncertainty
and allow the private sector to adapt and move forward than
would a generalized slowing of most implementation.
Of course, the Congress must continue to evaluate whether
the benefits of specific requirements of the law, and the law's
implementation more generally, are likely to exceed their
costs. As our economy recovers from this painful episode, it
must be reoriented from excessive dependence on debt, and
especially from dependence on foreign saving and capital
inflows to finance spending in excess of production.
Fiscal and regulatory policies must be structured to reduce
government borrowing over time and to encourage private saving
and business capital spending. Monetary policy must contribute
to a macroeconomic environment characterized by stable prices
and moderate fluctuations in economic activity to facilitate
longer term planning by governments, households, and
businesses. None of this will come easily or quickly, but it is
essential to promoting longer term economic growth and job
creation.
Thank you, Mr. Chairman.
[The prepared statement of Dr. Kohn can be found on page 76
of the appendix.]
Chairman Bachus. Thank you, Dr. Kohn.
Professor Scott.
STATEMENT OF PROFESSOR HAL S. SCOTT, NOMURA PROFESSOR OF
INTERNATIONAL FINANCIAL SYSTEMS, HARVARD LAW SCHOOL
Mr. Scott. Thank you, Chairman Bachus, and members of the
committee for permitting me to testify before you today. I want
to make clear I am testifying in my own capacity and do not
purport to represent the views of the Committee on Capital
Markets Regulation, which I direct, although much of the
testimony I am giving to you is based on the committee's
reports and statements.
My testimony today is focused on the implementation of the
Dodd-Frank Act. The rules that are now being written to
implement Dodd-Frank will have a profound impact on our
financial system and economy. These rules--the count is
questionable--240, 230--of which are being promulgated by the
SEC, the FDIC, the CFTC, the Fed, and the Financial Stability
Oversight Council, all of these rules will substantially revise
how we regulate financial institutions and markets in this
country.
President Obama, keenly aware of the danger to economic
growth of poorly formulated rules, is now focusing his
attention on the general regulatory process and its burden on
American competitiveness. But the independent financial
regulators are exempt from his new initiatives. As a result,
they will not be subject to review by the Office of Information
and Regulatory Affairs within OMB of their cost-benefit
analysis, nor required to provide 60-day comment periods, as
generally applicable in his executive order. Indeed, under
current law, only the CFTC has a formal cost-benefit
requirement.
Meanwhile, these agencies give on average only 45 days for
public comment on the Dodd-Frank rules, down from an average of
more than 60 days for rules issued in 2005 and 2006, and these
rules are extremely complicated and being issued at a frenetic
pace. In revising our regulatory structure, the most important
objective should be to get the rules right, not to act quickly.
And let me be clear. I am not urging delay to avoid or
unnecessarily defer regulation. I am simply advocating taking
the time we need to get it right.
I have four recommendations that may improve this process.
First, all the financial regulators, including the independent
agencies, should be required by Congress to evaluate their
rules, the costs, and benefits. In addition, OIRA should have
the obligation to file comments on the adequacy of their
analysis. The agencies would not be bound by such comments, but
they would be given the comments--not be bound in order to
preserve their independence.
I should say that the current head of OIRA, Cass Sunstein,
a former colleague of mine, has argued in various law review
articles that the independent agencies should be fully subject
to OIRA review. My proposal stops short of that.
Second, Congress should encourage the financial regulators
to report on their progress toward meeting statutory deadlines.
The CFTC has already missed a deadline, and more are likely to
follow. But this is understandable, and Congress should let
these agencies know that it will give them more time if such
time is truly needed.
Third, it can typically take days and sometimes weeks for
agencies to make available the full text of proposed and even
final rules. Congress should urge the regulators to make the
full text of regulations publicly available as soon as possible
so people can comment on them and react to them.
Fourth, it would be unwise, in my view, for Congress to cut
the budgets of the financial regulatory agencies in an attempt
to control or derail the regulatory reforms prompted by Dodd-
Frank. Tightening the purse strings will not stop the
rulemaking process. It will only make it worse. Agencies should
be given the resources they legitimately need to implement this
new legislation. If Congress wants to change the legislation,
it should do so directly.
I would like to take this opportunity also to highlight two
areas where the Dodd-Frank Act could be improved. Others are in
my written testimony. First, under Dodd-Frank, the newly
created Bureau of Consumer Financial Protection is funded from
the profits of the Federal Reserve. It should be funded like
other agencies through the ordinary appropriations process. In
addition, the Bureau needs a permanent director. Treasury's
temporary powers to guide the Bureau will be significantly
limited in July when the Bureau becomes a functioning agency.
The Congress should call for the President to tender such a
nomination as soon as possible.
Second, Dodd-Frank requires Federal agencies to purge
credit ratings from their regulations. Yet there is no clear
solution as to how to replace them; for instance, capital
requirements are heavily dependent now on ratings. In my view,
this legislation needs to be relaxed. In the short term, the
statute should be revised to prohibit undue reliance on the
ratings, not to ban the use of the ratings entirely. And other
options should be explored for the longer term.
Thank you, and I look forward to your questions.
[The prepared statement of Professor Scott can be found on
page 98 of the appendix.]
Chairman Bachus. Thank you. We have probably about an hour
before the first votes on the Floor. I am going to forego
questioning so more of our members can ask questions.
At this time I recognize the gentleman from Texas, Mr.
Hensarling, for 5 minutes.
Mr. Hensarling. Thank you, Mr. Chairman.
Dr. Poole, in your testimony--not to put words in your
mouth--I think you had your greatest angst with respect to the
spending trajectory in the future that creates the deficit and
the Federal debt that we are contending with now, is that
correct?
Mr. Poole. Yes. I am pointing particularly to the
entitlements, the outlays that are on autopilot.
Mr. Hensarling. I am not sure if you are aware of this, but
less than an hour ago you were referencing that the
Congressional Budget Office should project, I believe, future
tax increases necessary to finance the spending trajectory. The
CBO just issued its current baseline this morning, and they
project a $1.48 trillion deficit for Fiscal Year 2011, which
will be the single largest deficit in American history,
following the two previous $1 trillion-plus deficits that
occurred under this Administration. That is roughly 10 percent
of GDP, according to the Congressional Budget Office. According
to the Congressional Budget Office, debt held by the public is
estimated over the 10-year budget window to essentially double
from roughly $8.8 trillion in Fiscal Year 2011 to $18.2
trillion. I know that is not comforting to either of us.
You reference the President's Fiscal Responsibility
Commission. I was one of the House appointees to that
Commission. You said it would be useful to ask CBO to clarify
the issues of projecting the tax rates necessary to finance
spending under current policy. I think we both know the answer
to that. We had testimony from a number of different academics
from GAO, I think, including CBO. Frankly, to fund current
policy, as you know, is going to require a doubling of the tax
burden on future generations, crushing economic growth as we
know it.
In your testimony you say, ``I want to be blunt: Current
law projections versus current policy projections for future
years have become so distorted they are hardly worth looking
at.''
Can you expound on that view, please?
Mr. Poole. Yes. It is a point that is extremely important.
Let me just give two examples that everybody has heard of and
understands. For quite some time, we have had the annual so-
called ``doc fix.'' What the doc fix does is to delay the
scheduled, in the law, reductions in payments to physicians
under Medicare. Everybody knows that if those scheduled
reductions go into force, then many doctors will simply drop
out. My own ophthalmologist told me this: ``I'm 62 years old.
If those payments go in that schedule, I'm just going to
retire.''
And so what has happened is year by year by year there has
been the 1 year at a time doc fix, but the projections forward
for the outlays include the assumption that the reimbursements
will decline.
Mr. Hensarling. Dr. Poole, another way of saying that is--
and the Congressional Budget Office scores or estimates
essentially what Congress says as opposed to what Congress
does. Is that a fair assessment?
Mr. Poole. The CBO has done a fine job in distinguishing
between estimates based on current law, which would include
things like the decline in physician payments. Another good
example is---
Mr. Hensarling. I am sorry, Dr. Poole; I have a limited
amount of time here. I am going to have to move on.
Dr. Taylor, in your testimony you speak about rules-based
monetary policy. I know there was some angst on the other side
of the aisle that I share about having Members of Congress
interfere with conducting monetary policy. But when we look at
the actions the Fed has taken under 13-3, when we look at what
is happening to the Feds' balance sheet under QE II, when we
look at a Federal Reserve setting interchange fees, when we
look at a Federal Reserve setting credit card terms, this isn't
exactly your father's Federal Reserve.
So what is it--with Chairman Bernanke essentially seeming
to move us towards inflation targeting, does that seem to be
moving towards a rules-based monetary policy? Could you expound
on your views and what you see the Fed doing?
Mr. Taylor. I think the kinds of things you mentioned the
Fed doing are moving away from what I would call classic
traditional monetary policy, focusing on inflation and price
stability and overall stability, getting involved in fiscal
policy issues, getting involved in credit allocation. I don't
think you need to have an independent agency of government for
that. Professor Scott just mentioned the idea of the Fed
seigniorage paying for the new Consumer Financial Protection
Bureau. That is an example of this.
So I think with respect to the Fed, we need an independent
Fed to conduct monetary policy. And the more that can be more
rule-like, more predictable, as it was for many years in the
1980s and 1990s when we had long expansions and short
recessions, the better we will be. The more it becomes erratic,
more discretionary, more interventionist--you gave many
examples--the less desirable the policy is and the worse the
outcomes. I think we saw that in the 1970s, and we are seeing
that in last 3 or 4 years as well.
Mr. Hensarling. Thank you, my time has expired.
Chairman Bachus. For the record, would you clarify what was
the budget projection, the deficit for this fiscal year?
Mr. Hensarling. This is from news reports on my Blackberry,
so I certainly--members may have a differing opinion, but the
Congressional Budget Office estimates a $1.48 trillion deficit
for Fiscal Year 2011 at roughly 10 percent of GDP.
Chairman Bachus. That is approximately $1.5 trillion, but
of course, the President proposed $10 billion worth of savings
in 2014. So that would bring it down to $15 or $14.9 billion
from $1.5 trillion. He would bring that down a few billion
dollars.
Ms. Waters.
Ms. Waters. Thank you very much, Mr. Chairman. Mr. Kohn,
there seems to be some consternation among your colleagues on
this panel as to whether or not the Federal Reserve's dual
mandate makes it difficult to do its job. And we all heard what
Mr. Watt said when he came in about some of the attacks on the
Fed. So I ask you, given your background as a former Vice Chair
of the Federal Reserve, do you think that the dual mandate
presents a conflict for the Fed in carrying out its mission?
Mr. Kohn. I don't think the dual mandate has presented such
a conflict nor does it right now. I think right now we see both
inflation running below the long-run objective of 2 percent or
a little below, and unemployment running well above, as all the
members have said, well above where it ought to be over the
long run. So there is no conflict right now.
I think this is a discussion that the Congress should have.
Is there a reason to clarify the Federal Reserve Act? I do
think the last three Chairmen--Volcker, Greenspan, and
Bernanke--have all said that they recognize that price
stability is uniquely the responsibility of the Central Bank,
and really the first responsibility of the Central Bank. And
establishing a stable price environment is the way the Federal
Reserve, over long periods of time, helps to encourage maximum
employment.
I think it is also the case that not only variations in
inflation, but also variations in output interfere with the
ability of businesses--small and large--to plan, create
uncertainty, and are inimical to economic growth. So I do think
the Federal Reserve can do both. It can seek price stability as
it has and it can lean against business cycles in a perfectly
consistent way.
I would urge the Congress that if you decide to clarify the
objective, that you make sure there are two things: First,
considerable flexibility in pursuing these objectives over the
longer run; and second, that you do nothing to impair the
independence of the Federal Reserve in carrying out the
objectives you give it.
Ms. Waters. Thank you very much. I am going to move to Mr.
Poole. This hearing is not about Fannie and Freddie, but you
interjected your thoughts about Fannie and Freddie in your
testimony. As you know, it emerges as a huge issue in this
Congress. And as a ranking member of the Capital Markets
Subcommitte, it is one of those issues that I am going to be
very much involved in. While I have always supported the
mission of Fannie and Freddie, we recognize that they failed
us. They got into trouble, and we have to straighten it out.
And one of the things that I want to do is I want to work very
closely with the opposite side of the aisle and take the
politics out of dealing with this issue so that we can reform,
we do what we have to do to make sure that we don't have to get
in the kind of situation we were in before.
You talked about how easy it is going to be for private
firms to pick up the slack quickly. What private firms are you
talking about? Are you talking about Bank of America? Are you
talking about JPMorgan? Are you talking about Citi? Are you
talking about Goldman Sachs? Are these the firms that have no
problems? That didn't need a bailout? That could pick up the
slack quickly? Who are you talking about?
Mr. Poole. Yes, those it would be among the private firms.
Ms. Waters. I can't hear you. Speak right into your
microphone.
Mr. Poole. Do you want me to expand at all?
Ms. Waters. No, I want you to speak into your microphone so
I can learn which of the private firms can take up the slack
quickly.
Mr. Poole. I didn't say for sure that they would pick up
the slack quickly. I happen to believe that they would. Other
countries, high-income countries operate mortgage markets
without intermediaries of this kind and they work just fine.
There is no evidence that those intermediaries are necessary
for the mortgage market to operate satisfactorily. And if you
are worried about how quickly private competitors could come
in, if you think I am too optimistic, then there is a plan. I
have outlined it to phase it out slowly and allow time for the
private competitors to build their business plans and to come
into the market.
Ms. Waters. Did some of the private firms that you are
thinking about like Bank of America, whom we are working with
now dealing with serious problems with robo-signing in this
loan modification effort we are trying to do, or JPMorgan or
Citi or Goldman Sachs, all of whom we bailed out, having the
same kinds of problems, or potentially having those problems,
do you think these are the kinds of firms that can pick up the
slack?
Mr. Poole. There is no question that those firms have
created some problems for--
Ms. Waters. Just like Fannie and Freddie, wouldn't you say?
Mr. Poole. I would like to emphasize that some years ago,
both Fannie Mae and Freddie Mac had serious internal problems
with their accounting systems. They did not file reports as
required for the New York Stock Exchange, for example, for a
couple of years. So the issue here is not whether the private
firms sometimes make mistakes, and indeed, very serious
mistakes. It is a question of the relative effectiveness of the
government firms and the private firms and their cost and risk
to the taxpayer.
Chairman Bachus. Thank you. Mr. Royce.
Mr. Royce. Yes. Mr. Poole, you were president of the
Federal Reserve Bank of St. Louis for 10 years. I happen to
agree with Dr. Paul's thesis here, and many economists,
including the Economist Magazine laid out the case that the
Federal Reserve, from 2002 to 2006, had set a negative real
interest rate in the United States. And as a consequence of
that, we were going to create a boom bust cycle in housing
because we were flooding the housing market with credit, and
that was a mistake of the Fed. That was one of our errors.
But the second error, I think, was the government guarantee
implied that we had over with Fannie and Freddie, in a
situation at which Congress intervened in the market in a very
big way, in 1992, with the GSE Act in which we allowed them to
go into arbitrage; we allowed them to overleverage 100 to 1;
run up a mortgage portfolio of $1.7 trillion. A lot of it junk,
countrywide. And a lot of this was under a mandate from
Congress because we were muscling, Congress here was muscling
the market. The market wanted 20 percent down, we got that down
to 3 percent and then down to 0 percent. So what did we think
was going to happen?
Economists at the time--I remember John Taylor here,
Professor Taylor had a solution to both problems; he wanted the
Taylor rule first of all applied so that we would have a stable
monetary policy, we wouldn't have the boom bust that would come
about as a result of the flood of credit because we would keep
the monetary units stable. We wouldn't have a negative real
interest rate. And at the same time he and others, Dr. Poole,
yourself included, I think, warned about some of the
consequences with respect to this government guarantee.
We did not have a higher homeownership rate in the United
States than other developed nations. What we had instead was a
higher profit to the shareholders of Fannie and Freddie. Study
after study showed they were the beneficiary, and management
was the beneficiary. So you had managed earnings, you had all
the problems we went through.
Okay, going forward, what you argued for today was we
slowly bring the private market back in as we reduce the
conforming loan limits, as I understand basically your argument
there and we phase out.
Now this is the thing I want to ask you: Others are saying
well, we had that problem with the government guarantee with
Fannie and Freddie, but now why don't we bring back a
government guarantee. Do you think that brings back the same
problems with regard to moral hazard, the same problems with
regard to risk pricing that we had with Fannie and Freddie if
we bring in a government guarantee? Yes or no, Dr. Poole?
Mr. Poole. I would not have government guarantees for
mortgages at all. We don't have government guarantees for auto
loans, or for all sorts of loans in the marketplace. Why do we
need government guarantees for mortgages? It doesn't make any
sense to me.
Mr. Royce. I appreciate your response to that question. I
am also going to just ask--give Professor Taylor a chance for a
minute of explaining a little bit of foresight in terms of
keeping the monetary policies stable might help offset the boom
bust cycle that we experienced more in the United States than
anywhere else in terms of the way it hit our real estate.
Mr. Taylor. I think you need to just go back and look at
what happened in the 1980s and 1990s. We got that inflation
down, created price stability, kept to a reasonably predictable
rules-based approach, and we had two long expansions. And
certainly compared to what has happened recently, a small
recession. So it is clearly in the history. I also think it is
clearly in the--
Mr. Royce. Let me ask Mr. Scott a question, because this
goes to the Bureau of Consumer Financial Protection. For the
first time, safety and soundness regulation takes a back seat
to consumer protection. We saw this with the GSEs. We had
bifurcated regulation. And for those of us who carried the
legislation as I did some years ago to try to regulate the GSEs
for systemic risk, to try to bring down that risk, we had the
support of the regulatory community. What we didn't have was
HUD, right? And we didn't have Fannie and Freddie because they
were on the other side of that argument. Fannie had the biggest
lobby up here, they did not want to be regulated for safety and
soundness. They were going to carry out their mission because
it led to more profits for the shareholders, and especially for
management.
What do we do now to rein in the BCFP and ensure our
regulatory structure focuses on solvency regulation so we don't
run back into the type of situation we had with bifurcated
regulation we had before?
Mr. Scott. Do you want me to comment on that?
Mr. Royce. Yes.
Mr. Scott. I think the balance struck between safety and
soundness and consumer regulation is a question here because
FSOC, as you know, can override the new bureau by a two-thirds
vote. How practical is that? Even if you look at the
composition of FSOC, there's not really a true majority of bank
regulators on that group because it includes the CFTC, the SEC,
etc. So I think we need to look at that balance. I think it is
a question of different voting rules.
Mr. Royce. I think you should have to have a sign-off with
a prudential regulator in advance and that is what my amendment
was. I yield back, Mr. Chairman.
Chairman Bachus. Thank you. What we are going to do--there
is a vote on the Floor, so we will entertain questions from Ms.
Velazquez and Dr. Paul, then we well recess for 15 minutes. Can
the panelists all come back? So we will recess at the end of
Dr. Paul's questions. Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman. If I may, I would
like to ask each of the panelists the following question, and I
just need a yes or no answer. Do you believe that passage of
the Dodd-Frank Act is responsible for lenders constricting
their small business lending?
Mr. Poole. I don't think that is the major reason that
small business lending is restricted at this time.
Ms. Velazquez. Okay.
Mr. Taylor. I think the uncertainty caused by the
additional regulations is causing people to be more cautious in
businesses in general to stop doing what they would do.
Ms. Velazquez. I am asking because when I was listening to
the opening remarks made by our colleagues here, they were
basically saying that small businesses who are the ones
creating jobs in this country are not--they are limited by
access to credit. And that limitation is created by the fact
that financial institutions are constricting their lending due
to regulations.
Mr. Taylor. I think the uncertainty caused by all the new
regulations is making lenders more cautious, absolutely. So I
would agree with--
Mr. Kohn. No, I don't think Dodd-Frank is the major reason
for the reluctance to make loans to small business. I think the
reluctance to make loans to small business preceded Dodd-Frank
by quite some time and reflected uncertainty in the--
Ms. Velazquez. Will you say, if you excuse me, by the
collapse of the capital markets created by the lack of
regulation or lack of oversight?
Mr. Kohn. I am not sure ``created by,'' but I would say the
collapse of the financial systems and the deep recession
certainly made lenders very much more cautious, as is
understandable.
Ms. Velazquez. Yes.
Mr. Scott. Congresswoman, I think that actually the Basel
capital rules have much more of an impact on lending decisions
of banks than anything, particularly in Dodd-Frank. I think
that Congress should take a look at these rules in more depth.
So in a sense, Dodd-Frank permits this Basel process to
continue, but I think Congress should look at it.
Ms. Velazquez. And I would like for the record to reflect
that the last Federal Reserve survey that they conducted with
senior loan officers this past January showed how small
business lending is going up.
Today, in one of the news articles, we have here that the
equipment listing and finance association said business
originated $9 billion in loans, December. They doubled compared
to November. So they are accessing credit. I don't think that
the role of this committee is to rewrite history because the
Federal Reserve survey shows otherwise, and lending is going up
and small businesses are expanding.
Mr. Kohn, thus far, most of the efforts to splurge up
creation, particularly among small businesses, have centered
around providing credit for established businesses through
banks. Should more be done to support the growth of new
businesses, particularly since this is where the greater job
creation occurs?
Mr. Kohn. That was addressed to me?
Ms. Velazquez. Mr. Kohn.
Mr. Kohn. I think the Congress last year passed a law
trying to encourage banks to make loans to small businesses, I
think that was a constructive step. I think the regulators,
supervisors need to continue to make sure that they are not
discouraging loans to creditworthy businesses. I don't know of
any new steps that need to be taken, but I think the steps that
already have been taken need to be reinforced and that
encouragement given.
Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
Chairman Bachus. Dr. Paul.
Dr. Paul. Thank you, Mr. Chairman.
I would like to, first, say that I was very pleased with
Congressman Royce's remarks. I do want to follow up with Dr.
Poole, especially because you had a lot of emphasis on the debt
and the deficit that we are running up, and of course, many
people have been talking about that lately. But I became
fascinated with that subject as far back as the early 1970s
with a significant change in our monetary policy, because it
was very clear to me and many others that this is what it would
lead to. It would lead to massive spending, massive deficits,
and a massive increase in the size of government and that is
where we are. We are at a point of no return and no solutions.
So I am not a bit surprised that this has happened.
I don't like to separate the two, have the deficit problem
here and the monetary problem over here because I think they
are connected, and this is what I want to ask you about. Now
if--I know this is not on the horizon, it is not likely to
happen, I know some of the downside arguments from this, but
just dealing with the question I am going to ask, dealing with
the deficit: What if the Fed couldn't buy government debt, what
kind of pressure would that put on the Congress to act
differently?
Mr. Poole. Congressman, let me address it in two pieces. It
has been known since the late 1970s that the demographics were
moving in a direction, and starting in 2010, there would be the
beginning of the retirement of the Baby Boom generation, and
that the entitlements, in effect, would become untenable with
the very large change in the demographic structure of the labor
force. That was known in the late 1970s, and economists and
others have been preaching about that without any effect.
When we talk about a monetary policy adjustment, whatever
you want to call it, of the type that you have in mind, it is
critical to know what the alternative is. My teacher and
mentor, Milton Friedman, always used to say, you can't enter a
horse race without a horse. So you may not like the horses that
are in the horse race, but you have to have a horse to enter
that race.
Dr. Paul. But Milton Friedman also suggested very strongly
that he would replace the Fed with a computer, and that is the
way he would regulate the money supply. But my suggestion here
is that if the Fed didn't buy the debt, interest rates would go
up, and the burden would fall on the Congress because they
would have to cut back because they were consuming all the
savings. Of course now today we don't say, we just create our
so-called capital out of thin air.
But another question to follow up on this is, with an
individual, when they get into trouble, if they have too many
credit cards, and too much debt, and they get new credit cards
and on and on, but finally it has to come to an end, and they
have to make a decision, they declare bankruptcy and liquidate
that debt and maybe get a chance to start over again, or they
might decide, I have to pay my debt down, I have to work
harder, get an extra job, my wife has to work, but cut
spending. And they do that, and they can get their house in
order again and then their standard of living might grow again.
I don't know why those rules can't apply to government as well.
But isn't it true that in recent decades, we don't do
anything to allow liquidation of debt, as a matter of fact,
that is the greatest sin of all, is to allow the liquidation of
debt. And it is the liquidation of debt that allows the growth
to come back. So how do we get growth if we don't liquidate
debt? All we do is transfer the debt. The people who make a lot
of money on Wall Street and the Fannie Maes and Freddie Macs,
and then they get in trouble and we buy out this illiquid debt,
the worthless debt and put it into the hands of the taxpayer,
and the problem still exists.
How in the world can we get growth again if we don't
liquidate the debt? Or do you buy into the school that says
that is not important, we don't need to, we can just build debt
and debt and keep it going forever. How would you rationalize
and how would you solve this dilemma?
Mr. Poole. I tried to be very clear that we will have a
crisis ahead of us if the Federal budget is not fixed in very
significant ways, and that the fix has to focus on spending. I
thought I was very clear about that. We will follow the course
of Greece, of Ireland, and of the other countries in Europe,
Portugal, that are under the greatest pressure right now. We
will get there if this problem is not fixed.
We won't get there quite that way--because the ``solution''
that results will be a rip-roaring inflation. See every
inflation in the history of the world has come about because
of--great inflation because of fiscal imbalance.
Dr. Paul. I agree with that, but I think there is a much
closer connection. I think the Federal Reserve allows Congress
to be irresponsible. And if they didn't facilitate the debt,
the Fed is the great facilitator of big government and debt. If
they weren't there to buy up this debt, believe me, we would be
much more responsible about how we manage our affairs. I yield
back.
Chairman Bachus. I thank you. At this time, the committee
is going to recess for approximately 15 minutes. We understand
the second vote may actually be by voice, so we will be back in
approximately 15 minutes.
[recess]
Chairman Bachus. This hearing of the Committee on Financial
Services will come to order.
At this time, I recognize the gentleman from North
Carolina, Mr. Watt, for 5 minutes.
Mr. Watt. Thank you, Mr. Chairman. Perhaps it is an
indication that you have been around an institution too long
when you look at the title to a hearing, and you instinctively
sense that the hearing is probably going to be about something
other than what the title is about. And then you look at the
testimony and you find that it probably is about something
other than the title, what the title indicates the hearing is
going to be about.
And then you predict in your opening statement that the
hearing is going to be about something different than what the
title indicates that the hearing was going to be about. And
then you find that your prediction was correct.
Everybody's talking about bashing the Fed and the decisions
it has made in the past. I suspect the second panel will be
bashing Fannie and Freddie and the decisions that they have
made rather than about promoting economic recovery and job
creation, which we have had little discussion about.
I do want to thank my colleagues on both sides of the aisle
for at least getting this topic on the table, on top of the
table, rather than trying to hide it under the subterfuge of
promoting job creation. And I want to thank, particularly Dr.
Taylor, for putting it front and center in his paper. I am
looking at the--clarify the objectives of the Fed and it says,
in order to achieve a more predictable rules-based policy and
bolster the Fed's independence.
I guess everybody says we believe in the independence of
the Fed. Section 2 of the Federal Reserve Act, which lays out
the objectives and reporting requirements for the Fed should be
amended. That is very transparent. And it is quite apparent
that he disagrees with Mr. Kohn that price stability and
inflation control and job creation should be equal pillars of
our dual mandate here. One should be subordinated to the other,
although I am sure he will make a case to the contrary.
I think we have to deal with this. We have to deal with it
forthrightly if we don't think the Fed ought to exist or if we
think the Fed's mandate should be changed, we should change it,
not have scholars come and tell us that they believe that it
ought to be something else, which is your right to do, Dr.
Taylor. You are at least forthright about it. You say, I think
the Fed's mandate ought to be changed, it ought to be amended.
Congress ought to be forthright enough to deal with that, if we
believe that. And we ought to be forthright enough to know,
which I may argue a little bit with Dr. Taylor about, that if
we don't do one or the other, you can't have it both
independent and be constantly second-guessing and first-
guessing and making it cater to you all the time.
So anyway, back to the subject at hand, that is my little
prediction; I made the prediction in my opening statement.
Unfortunately my prediction came true that this is more about
the Fed and its policies.
But the hearing title says promoting economic recovery and
job creation. Nobody on this panel has really told us what they
think we should do to create jobs and promote economic
recovery. So Mr. Poole, if you could direct yourself to that
specific thing and then go right down the line, I would
appreciate it. We got a lot from you about how some intern
didn't get hired because of health care reform, which I thought
was an insult to us, but you didn't tell us how you how you
think we ought to be creating jobs and promoting economic
recovery which is the subject of this hearing, I thought.
Mr. Poole. I am eager to talk about that subject. I want to
emphasize that every business decision is based on some sort of
calculation as to whether the investments, the costs that you
put into it can be recovered by the revenue that you get out of
the market.
Mr. Watt. That is economic theory. I want to know what you
would have us do to create jobs.
Mr. Poole. What that means is that the government needs to
do everything it can to make sure that the conditions under
which businesses have to make those decisions are as
predictable and stable as possible. Now we have extreme
examples of--okay.
Mr. Watt. Dr. Taylor?
Mr. Poole. Would you let me finish?
Mr. Watt. Dr. Taylor, would you give us your estimate of--I
just want one sentence from each one of you on the subject of
the hearing.
Mr. Poole. That is the subject.
Chairman Bachus. The gentleman's time has expired, so if
you will just--
Mr. Watt. And I was trying to expedite getting a response
from each one of these gentleman rather than a lecture from Mr.
Poole.
Chairman Bachus. That was a 4\1/2\ minute question. So, the
question was 4\1/2\ minutes long.
Mr. Taylor. I believe my testimony, both written and oral,
did address the job issue. I think the most important thing to
do now, based on experience and economics, is to create a
stable fiscal policy, a sound fiscal policy which people can
rely on, remove all that uncertainty about the debt, and the
same goes for monetary policy. I sincerely believe that is the
most constructive thing you can do. Thank you.
Mr. Kohn. In my testimony, I noted that there may not be a
lot of things we can do; patience may be one of the things that
is required here. But I do think policy, on several fronts, can
reduce uncertainty, both the monetary policy needs to be--
monetary authorities need to be clear what their objectives are
for inflation and the fiscal authorities need to get their arms
around tax and spending policy so the people know what to plan
for tax rates and government support. The regulatory
authorities need to weigh the costs and benefits of their
regulations carefully. And the last thing I would say, that is
not in my testimony, is we need to educate our workforce so
that when the jobs are created, they can take them. That is
critical.
Mr. Scott. Congressman, I think we need a strong and well-
functioning financial system to create jobs, because the
financial system is sort of the life blood of our economy. If
loans are not made to small businesses, that affects jobs. So
we have to be, overall, concerned that we are not doing things
that lead the financial institutions not to do what they
otherwise might do by making loans.
Now that can be as clear as capital requirements which
might be too onerous so that the banks will not make loans. We
have to be careful with safety and soundness, but at the same
time, we should not overdo it. It can be as indirect as
derivatives regulation. So a very big issue in derivative
regulation has been, how are end users going to be treated? Are
they going to be exempt from a lot of these margin requirements
in central clearing? That was an issue in the consideration of
Dodd-Frank. If they aren't, and they are burdened by
regulation, they may not be able to hedge as well, their
business may suffer, and they might hire, therefore, fewer
people.
So I think all of these regulations have a way of
ultimately affecting jobs. If they are too burdensome on the
financial system, they will produce less jobs.
Mr. Watt. Thank you, Mr. Chairman.
Chairman Bachus. Let me say this: The question and answers
were almost 9 minutes. So what we will do at the end of the 5
minutes, is we will let a witness who is answering a question
continue to answer that question. But if each of you can make
your questions a little more concise, I think we will have an
opportunity for everybody to ask questions.
Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman.
Professor Scott, in your testimony, you talked about--you
gave observations on the Volcker Rule and its implementation.
And I am concerned that Europe, other countries will not adopt
the Volcker Rule which leaves U.S. financial institutions to go
it alone and making our financial sector less competitive and
forcing, perhaps, businesses and jobs to leave the United
States for Europe. Could the Volcker Rule be implemented so it
makes our financial system more stable without needlessly
making our financial system less competitive?
Mr. Scott. I think we need to be very careful how we
implement the Volcker Rule. I was not one who supported the
Volcker Rule in the very first place, let me be very clear on
it. But if we keep it in place, I think we should interpret it
narrowly not broadly. And I have offered a definition in my
testimony as how that can be done.
If we don't do that, Congresswoman, we are going to be
doing two bad things, in my view. First of all, we are going to
suffer a lack of competitiveness because of competitive
institutions abroad all do this proprietary trading.
Indeed, if you go back to the Glass-Steagall reform, it was
to put us on an even competitive balance, in part, that we
liberalized Glass-Steagall and now here we are going in the
other direction, but we have done it. All I am saying is, let's
be conservative in how we implement it.
Secondly, actually a very broad Volcker Rule, in my mind,
can impact the safety and soundness of our institutions. These
activities, in some ways, were diversification from typical
lending, and therefore, over a long period of time made these
institutions more stable. And this was not the cause of the
financial crisis. Goldman Sachs profited a lot by its
proprietary trading activities during the financial crisis. If
they had all been making loans, they would have been worse off.
So I think we should be very conservative in the way we
implement the Volcker Rule.
Mrs. Biggert. I haven't been really happy with it either.
Do you think it would be better not to have it at all or does
it provide the stability that is needed?
Mr. Scott. Could you repeat that? It is my hearing; it's
not you.
Mrs. Biggert. I just wanted to know, would it be better not
to have the Volcker Rule at all, or does it provide the
stability if it is narrowly defined?
Mr. Scott. Yes, I am on record as saying we shouldn't have
a Volcker Rule. I testified in the Senate on that. I think we
would be better off without a Volcker Rule. But having gotten
the Volcker Rule, I think we should be conservative in how we
implement it.
Mrs. Biggert. All right. Thank you.
Professor Taylor, in your testimony you commented about the
fact that the unemployment rate is inversely correlated with
private investment. Could you comment further on the ways that
we can help spur the private investment and create jobs? I am
also on the Housing Subcommittee, so if that relates at all, it
would be helpful to me.
Mr. Taylor. Sure. It is correct, it is both housing
residential investment and business fixed investment. They are
both highly correlated. And you can just see in the residential
much more clearly where the pockets of high unemployment are
right where we had the biggest boom bust in housing. Nevada is
the classic extreme. But it is also business fixed investment.
Here it seems to me the most important thing to do is not
raise taxes on businesses, period. Try to find ways to reduce
them where you can, or corporate rates are still very high. I
think it is very important to think about these regulatory
issues which some of you have raised in your opening remarks,
both on the financial side, but also on the health care side,
that really restricts the incentives for businesses to start
up, whether it is small or big. And these start-ups, or these
expansions, is what investment is. And so investment grows, and
you hire people to build the equipment or construct the
structure, and that is the most important thing, in my view.
I think there tends to be too much emphasis on the short-
term things. Short-term stimulus to investment, and that maybe
works a little bit, but then it peters out, and then we are
stuck in the same situation. So I would think more long-term
sustainable type of things.
Mrs. Biggert. And can you give an example of that that?
Mr. Taylor. Say the short-term incentives for businesses to
write off for a period of time, they sound good, but then they
go away and it is reversed. So if you can keep--I think keep
the tax rates stable and certain so that a business, or you
build a structure or a new plant the returns are going to be
coming out for many years, not just 1 year.
Mrs. Biggert. Everything seems to depend on uncertainty; it
seems like that we have right now, thank you.
Chairman Bachus. The gentlelady from New York.
Mrs. Maloney. Thank you, Mr. Chairman, and I thank all the
panelists. We did get some good news today; the Dow crossed
12,000 for the first time since June 2008. And that shows that
we have some liquidity going, which is a good sign of recovery.
During this financial crisis, which was so painful, and it
was difficult at times to get Congress to act. And at one
point, we did not pass the TARP program, which put the banks
and the money markets, some of them in my district, into a run
on the markets. There were some that were calling me screaming,
they could see it crashing. And when we finally passed it, they
stabilized the markets, and I just came from a hearing with
Treasury where they are saying that we literally made money on
it by all accounts. Specifically, a report by a Democratic
economist, Blinder, and a Republican, Zandi, that is probably
the best thing I have read on it where they go into great
detail on how this program helps salvage the markets.
My question really is to Mr. Taylor, in your very
thoughtful testimony, about the Federal Reserve and going to a
rules-based policy. Some economists have given the Federal
Reserve a great deal of credit for being flexible, reacting,
taking risks that, in many cases, worked out for helping to
stabilize the economy.
So my question, Mr. Taylor, or Dr. Taylor, is would the
rules-based policy that you are proposing rule out the ability
for the Fed to act as they did in this last crisis with great
flexibility and great courage and great innovation?
Mr. Taylor. I think what it would have done, in my view, is
prevent us from getting into the crisis, if the rules-based
policy had been followed in advance. So you have to go back and
say, if rates had not gotten so low, or if the rules on the
books of the regulatory agencies had been enforced properly,
rules-based regulation, then I think we could have avoided this
crisis.
With respect to, when the crisis came, and especially in
the panic, at the time we are talking about with the TARP, I
did give the Fed substantial credit for establishing the
commercial paper, funding facility, the money market mutual
fund interventions.
Those seemed to me quite constructive. But the most
important thing at that point was to reduce the uncertainty
caused by the TARP. After the TARP was put into action, then
you had the crash of the markets. That is when the S&P 500
dropped by 30 percent. It wasn't until how that money would be
used that the market stabilized. So there are lots of things
going on at that point in time, but I would say, in my view, no
better evidence that rules-based policy worked than going back
to periods where it was followed and seeing how good
performance was and looking at other periods where it wasn't
and seeing how poor performance was.
Mrs. Maloney. And so you are saying going to rules-based
policy, if I understand you correctly, it would give us the
format, but in cases of a crisis such as that to have some
flexibility for the commercial paper and other things that they
did?
Mr. Taylor. Absolutely. In fact, my proposal to go back to
the kind of reporting that existed before the year 2000 is just
that. That reporting was that the Federal Reserve Chairman
would come and report on the plans for money growth, and if
there were deviations, the Chair would be required to say why.
It is the same idea. I would like to suggest that kind of
reporting requirement be reinserted, but it focused more
generally on the strategy for the Federal Reserve. And if they
decide to deviate from their own strategy, then they should be
required to come here and tell you why.
Mrs. Maloney. Dr. Kohn, would you like to comment in my
remaining seconds?
Mr. Kohn. Yes, Congresswoman, I would. I don't think that
our interest rate policy was the main cause of the housing
bubble. I think that the main cause was a breakdown in
supervision in regulation, as well as a breakdown in the
private markets ability to supervise and regulate itself. And
that is what caused all this financial innovation, the CDOs,
etc. that people didn't understand, the huge amount of
leveraging, etc.
We had in the 1980s and 1990s, a number of business cycles
and a number of asset cycles--think about the S&L problem at
the end of the 1980s, and the early 1990s that the Congress had
to legislate taxpayer money to shore up the insurance fund--
that happened when Professor Taylor says we were following a
rules-based policy. But it was a failure of supervision and
regulation.
Think about the dot.com boom and bust when we were
following a rules-based policy according to Professor Taylor.
So I think, following John's formula, that wouldn't have
prevented what happened, maybe made a small difference around
the edges. In the end, inflation was lower; inflation in 2006,
2007 was 2\1/2\ percent. It is not that we had such an easy
policy that CPI inflation got way high. I don't agree with
that.
I do think that the reporting of the Federal Reserve to the
Congress could and should be strengthened. From my years of
sitting behind this row, right behind Alan Greenspan and
consulting with Chairman Bernanke, I think the dialogue between
the Congress and the Federal Reserve is in vast need of
improvement. And it is from both sdes. You don't need to pass a
law for you folks to ask the chairman better questions.
And I think too often the dialogue between the Congress and
the Chairman of the Fed gets off on all kinds of directions
where--I am going to regret some of these things I say, I
think, but where Congressmen are trying to enlist his help in
endorsing their particular ideas. I think the Federal Reserve
should be required to say what its strategy is, not necessarily
on a numerical basis, but how it will react to changes in the
outlook for inflation and employment, what it expects the
outlook for inflation and employment to be, and how its
strategy is consistent with achieving the objectives that
Congress has given it.
And I think you guys need to ask really tough questions of
the chairman about that. So I think that dialogue definitely
needs improving. Whether you need to pass a new law to do that,
I am open.
Chairman Bachus. Thank you. At this time, the gentleman
from New Jersey.
Mr. Garrett. I thank the Chair. Just off the top, the name
of the hearing that we are having today is, ``Promoting
Economic Recovery and Job Creation, the Road Forward.'' I think
what you are testifying to is right on the mark to describe
basically where we are, what regulations are in place and
whether it is Fed policy, as you were just--Dr. Kohn was just
talking about or otherwise. These all go to the point of what
do we need to do in order to get our economy back on track and
create jobs.
Let me go a little afield on the first question here, and I
guess I will throw it out to Dr. Poole, but anyone else can
just chime in real quickly on this. There was a piece on CNBC
just this weekend with regard to Fed accounting, that is why I
throw it out to you. It said in accounting methodology was just
recently reported in their weekly report, which is argued that
a change in the Central Bank to allow the Fed to incur losses,
even substantial losses without eroding capital. Any future
losses that are made, the Fed may have occurred said will now
show up as a negative liability as opposed to a reduction in
Fed capital, thereby making a negative capital situation
technically impossible. That was a comment of Brian Smedley, a
former New York Fed staffer.
Are you familiar with the recent change they have on their
accounting policy?
Mr. Poole. I am not familiar with that, but I would like to
emphasize the following very simple point, the Central Bank is
not in business to make a profit; it is in business to make the
economy work better. And if the Federal Reserve has to take
losses to make the economy work better, to help create jobs,
then so be it.
Mr. Garrett. Right, but don't you want to have--I
understand, but don't you want the transparency there to make
sure--the argument goes, right now we saw what is going on in
Greece and what have you, and the question is can our Federal
Reserve basically ever go broke? This accounting change
basically--I guess, the Fed, anybody else can chime in on this,
the Fed does their own accounting methodology, we are not
setting the accounting rules for the Fed, is that correct?
Mr. Kohn. The Federal Reserve does its own accounting, but
it is audited by Deloitte & Touche, I think it is D&T these
days.
Mr. Garrett. But the audit goes against the rules that they
establish for themselves, right?
Mr. Kohn. To a considerable extent, but the Federal Reserve
follows GAAP accounting in most respects. I think the point is
that this will be completely transparent, Congressman. If you
want to take this account and subtract it from another account,
in fact, transparency, if anything, will be increased, because
that number will be right there published on a weekly basis. So
it is not about transparency.
To Professor Poole's point, this isn't about profitability.
The viability of the institution is absolutely unassailable.
You, the Congress, have given it the seignorage privilege. We--
the Federal Reserve--I am still doing that a little bit, I am
sorry. The Federal Reserve issues the currency on behalf of the
country and realizes the returns, and returns $30 or $40
billion a year to the Treasury from doing that. And the capital
on the books of the Federal Reserve is not, in any way, related
to the present value of future stream of earnings.
Mr. Garrett. Anyway, I don't want to spend a lot of time.
But this puts it, as I understand it, as a liability to the
Treasury as opposed to a liability of the Fed's balance sheet,
which it has been up until this point in time.
Mr. Kohn. This situation hasn't really arisen in a
significant way before. But there have been a few occasions
where the Federal Reserve delayed sending money to the Treasury
in order to replenish the capital account. This is a little bit
like a deferred tax asset on the books of a private
corporation, I think.
Mr. Garrett. Okay. Professor Scott, you talked about the
issue of cost benefit analysis that you did there. So have you
all--I am running out of time already. You have all the Dodd-
Frank rules where you are not going to have cost benefit
analysis. Do you just want to elaborate quickly as to the need
for those there and across-the-board in general, is that a good
thing or a bad thing, and what should we be doing?
Mr. Scott. I think if we are concerned about the impact on
the economy when we are promulgating regulations, it behooves
us to look at the costs and benefits of the regulation, pretty
simple.
Mr. Garrett. The Administration doesn't think so because
they said they want to scrub all the regulations. There are 195
regulations that are not here, 195 regulations that are just in
the formal process, they won't be scrubbed. There are about 300
regulations coming out of Dodd-Frank that won't be scrubbed. So
on the one hand last night, they said let's scrub everything,
but let's not scrub these 495 regulations and do the cost
benefit analysis of it.
Mr. Scott. We, at least, Congressman, should require that
any regulations now in process be subject to cost benefit
analysis. So not everything is done. They are in the process of
asking for comments on the regulations. They haven't
implemented very much regulation. If the Congress were to act
now to require this, I think it would have a major impact.
Mr. Garrett. Okay, thank you.
Chairman Bachus. The gentleman from Georgia.
Mr. Scott of Georgia. Thank you, Mr. Chairman. This is very
frustrating to me, and I think very frustrating to the American
people when we are trying to talk about jobs. The American
people are suffering out here. And I think that this discussion
from the title and moving from the title, not focusing, and I
think it points to a kind of a schizophrenic approach we have
to this whole issue of jobs and the Federal Government and the
spending. It is kind of double-minded. How can we talk about
spending money to invest in the economy to create jobs, and at
the same time, we are talking about cutting the budgets,
cutting deficits.
There are those in this Congress who want to see the
Federal budget cut by 25 percent, but there has been no thought
as to what that means for employment and jobs. Eighty percent
of that cut means putting people in the Federal Government on
the unemployment rolls. There probably would even be a greater,
if we follow a pattern of impact on jobs from the Federal
Government, of adding to the jobless rate.
And so how do we do both? How do we handle this tug of war,
this confliction here? And what spending cuts from the Federal
budget would amount to the least reduction in jobs? There has
been no talk. Everybody wants to cut, cut, cut, but nobody is
stopping to realize the impact that has and will have on the
jobless rate. What do we do with that? How do we handle this?
And might the Federal Government be playing a more damaging
role as far as jobs, not only not being able to create jobs,
but the biggest impact we may make is adding to the
unemployment that is already out there with these Federal
workers who will be cut from the budget. Can you respond to
that? How do we do fit this round hole in to a square peg?
Mr. Poole. Let me dive in very quickly. We have to remember
that, of course, our aim is to improve jobs in the entire
economy. Hiring more people into the Federal Government does
not necessarily improve jobs in the entire economy. It may well
displace people from private employment and that is exactly
what I think has often happened. You get the surface appearance
of more jobs because they are on the Federal payroll, or State
and local government payroll, but in fact, they are being
displaced from private sector job growth.
Mr. Scott of Georgia. All right.
Mr. Taylor. Actually, I don't think it is a square, circle
issue. It seems to me there is a consistency here between
reducing the growth of spending, reducing the share of GDP, if
you would like, that goes to government spending and reducing
joblessness. We have had huge increase in government spending
as a shared GDP in the last 3 years. And unemployment has gone
up. I am not saying that is the cause, but you should just
think about that for a minute. If you look at some of the
charts in my testimony, you see private investment is driving
this unemployment rate. I think a closer correlation than you
really can understand. But you have to think the best thing may
be to get this budget under control, that may be the best thing
to reduce unemployment.
Mr. Scott of Georgia. Let me ask you this, what spending
could be cut, in your opinion, from the Federal budget that
would result in the least amount of job loss?
Mr. Kohn. I think what the Congress needs to do is to think
about the path of spending over time. So my personal view would
be that cutting a lot of spending now would probably cost jobs,
not necessarily whether it is Federal Government jobs or other.
We do have a 9.5 percent unemployment rate, there are
underutilized resources out there. It is not a case of trying
to have both under these circumstances, but there is a huge
amount of uncertainty about what the path to fiscal sanity
looks like. And I think the Congress and the Administration
need to get together and figure out that path, even if it
doesn't involve cuts today, it will involve some adjustments in
entitlements. There is just no way that the path to fiscal
sanity, as Professor Poole pointed out in his testimony, can
avoid doing something about Social Security and Medicare
spending in the future, but there needs to be a commitment to
doing something in the future to relieve the uncertainty about
tax rates and spending.
Chairman Bachus. Thank you. The gentleman from Texas.
Mr. Miller of California. California.
I love this conversation, fiscal sanity with a $1.5
trillion budget deficit. Government has increased spending
every year through this recession when businesses and the
private sector have had to reduce spending. Husbands and wives
sit at home determining how they will feed their families, pay
their rents, pay the mortgage for the next month, and manage
their finances through the next year. And we say, what impact
will these cuts have on the Federal Government? Woe is us. If
you look at the States, and counties and cities, public employ
retirements is bankrupting this country. And we are more
concerned about how these impacts might impact the Federal
Government--these cuts might, is a ridiculous argument.
We need to be competitive globally. And for us to do that,
we have to stop mandating the private sector. We have to let
the business community know and understand that we are not
going to continue to mandate them tomorrow and steal the money
from them tomorrow to make us be able to do what we want to do
today.
We are trying to compete with India and China. They have
great ideas. They are going to grow jobs in their country. And
we have the EPA closing down the harbor in Long Beach and LA,
and the Mexicans building one in Mexico because regulation in
California is driving them out of California. And we worry
about what these impacts will have on the Federal Government.
We need to start saying, What can we do to grow the
economy? And just based on the basic money multiplier, every
time we take a dollar out of the private sector, that is going
to impact the growth of this economy. We cannot continue to
take from the government and think we are creating jobs. No. We
are hiring government employees. And what are we producing in
the economy? More paperwork.
And you ask businesses, Why are you not expanding? Because
bureaucrats in local, State, and Federal agencies are mandating
us to a degree, putting us through a process that is so
protracted, we don't know what to do.
I got a call from a dairy 2 weeks ago. They use a product
on their floor that says, ``If you use a product, just notify
everybody.'' You can use up to 10 pounds if you want to without
any notification. You can use 500 pounds if you want to and
just notify everybody. They used 30 pounds. It didn't impact
police, fire. But they forgot to notify one agency. So they
were fined by EPA $182,000 because they forgot to send a
letter.
Now what does that do to grow the economy? Nothing. And
some of our witnesses today have talked about reducing
spending, controlling regulation, reducing regulatory
uncertainty. Basically, Dodd-Frank creates a tremendous amount
of that. Reducing the size of the Federal balance sheet and
keeping inflation in check; those are great. None of that has
to do with the impact on the Federal Government because we
don't tax enough.
But what we are doing, based on the testimony I have heard
today, is ruining this economy. We cannot continue to spend
money we don't have. And then the President gives a speech
saying, ``the top 2 percent are just going to have to pay more
of their fair share.'' Look at how much they are paying. And
every time we take more of their fair share, we hurt jobs in
this country, because those are the people providing the jobs.
So if we are going to be globally competitive, we need to
make sure regulations are in check and not burdening the
American companies that have to compete with China and India.
We say China; you can't even own property in China. If you
want to build a building, the government is going to own your
property. You are going to build a building, and they are going
to be joint partners with you. I have had three people from my
community who have been held in China and had their passports
taken from them because they owed a business in China some
money. And it was a contractual dispute, did not go to court,
but the Chinese Government said, ``Until you pay the money, you
are not leaving our country.'' Now that is a great democracy.
And we are having to compete with them. They are also fixing
their currency based on ours so we cannot be competitive.
We need to change the direction of this country. We need to
stop looking to get into people's pockets and start protecting
the American people. We need to say, ``We are not going to
regulate you to death; we are not going to tax you death. We
are going to create an environment where we cannot guarantee
success, but you have an opportunity to succeed.'' And we are
doing quite the opposite.
So would you like to answer my question?
I think we are headed in the wrong direction. I think if we
keep talking the way we have talked in the last 2 years, this
country is in dire straits. We are going to be in real trouble.
We need to start talking from the perspective of the American
out there who knows what they are facing in the economy. They
are losing their jobs. The ones who have lost it are having to
compete with 8 million illegals here who have taken their jobs.
And we are talking in a presidential speech of making everybody
legalized in this country and not protecting the American
worker.
We need to be on the side of the American workers. People
who are in this country just trying to survive, are losing
their homes. We need to change the direction of this government
and make it responsive to them. This is supposed to be a
democracy of laws established by the people to govern
themselves. And we have become so heavy-handed, that does not
work any more.
I yield back. Thank you, Mr. Chairman.
Chairman Bachus. Thank you.
Mr. Green.
Mr. Green. Thank you, Mr. Chairman.
Mr. Chairman, I think that if we are going to properly
resolve or solve a problem, we at least ought to define the
problem and know what the problem is. One can conclude that the
elimination of a finger is appropriate for a hangnail, but I am
not sure that is the best way to resolve the problem.
Those who contend that Fannie and Freddie are the problem
have to ask themselves: Did Fannie and Freddie mandate 3/27s
and 2/28s? Did Fannie and Freddie mandate loans without proper
documentation? Did Fannie and Freddie create an environment
such that loans were made and those who made the loans were not
responsible for them; they would simply pass them on to others?
Did Fannie and Freddie create prepayment penalties that
coincided with teaser rates? Did Fannie and Freddie conclude
that the persons who created loans could have a yield spread
premium that would allow them to force consumers who had good
credit into subprime loans?
All of these things can be traced back to the Alternative
Mortgages Transaction Act. And those of you who would like to,
you may check that and you will find that I am close. I may not
have the title exactly right. But we deregulated. We decided
that we would allow for greater products in the marketplace.
And when we decided to deregulate and allow these greater
products in the marketplace, we didn't consider the unintended
consequences all of these products in the marketplace going on
and being securitized and passed around the world, in fact; not
just in the United States of America.
So we really ought to properly define the problem before we
decide we are going to eliminate Fannie and Freddie. Fannie and
Freddie by any name will do the same thing. So those of you who
want to give us another name--Annie and Teddie, Rough and
Ready--you are still going to have the same circumstance to
contend with. And at some point, we have to have a serious
discussion about how are we going to continue to allow an
individual with good credit to get a loan and allow that loan
to move from the portfolio of the bank to a secondary market?
That is really what we are going to have to at a some point
have a look at.
Next point: There is a lot of talk about uncertainty. Why
do we focus solely on the uncertainty that businesses have?
Consumers have uncertainty, too. Multiple uncertainty is what
we are dealing with. And the notion that millionaires create
jobs ought to be dispelled today. Millionaires don't create
jobs. Demand creates jobs. Give a millionaire another million
dollars, and if there is no demand, the millionaire pockets the
million dollars, and he goes on or she goes on her way. If
there is demand, then jobs will be created, because people
respond to demand. No demand, no job creation.
So we have to find a way to not only allow those who would
facilitate the production of jobs by virtue of having capital
to do so, but we also have to understand that there has to be a
means by which this uncertainty that the consumer has can be
overcome such that the consumer is willing to go back into the
marketplace. Without the consumer in the marketplace, without
the demand, the jobs don't get created.
Dr. Kohn, do we have jobs created when there is not demand?
Mr. Kohn. At the current time, there is an insufficiency of
demand, I agree.
Mr. Green. Let me just ask you, if I may, because time is
of the essence. I am under the yellow light. You agree that you
have to have demand to create jobs, true?
Mr. Kohn. Yes.
Mr. Green. Do you also agree, Dr. Kohn, that these exotic
products were not mandated by Fannie and Freddie; that the
genesis for them was a lack of regulation brought on by
deregulation?
Mr. Kohn. I think there is a lot of blame to go around. In
the private sector--
Mr. Green. But do we want to overlook that blame, is the
question.
Chairman Bachus. Let me--
Mr. Green. My time was not up. It was on yellow.
Chairman Bachus. Let me say this. Let's just pause for a
second. The last vote is now going to be at 12:30. We have a
second panel. After this question, and then Mr. Neugebauer, if
we could go to the second panel, is everybody in agreement?
Mr. Pearce, too?
We will go two on each side. And then you can all question
the second panel. Would you rather have your time on this
panel?
This panel? The second panel?
We will reserve two for the second panel, and you all will
go first on the second panel.
Mr. Green. Mr. Chairman, may I just restate that question?
Mr. Kohn. Fannie and Freddie did not create those CDOs and
those exotic mortgages. And they came to the party kind of
late. I do think that Fannie and Freddie were a systemically
risky operation where the losses were socialized; the gains
were privatized. And they need to be reformed. It is a position
that--
Mr. Green. And if I may say so--my time is up--I absolutely
concur with you, but let's not overlook how the products got
into the marketplace.
Mr. Kohn. The private sector bears plenty of responsibility
for what happened.
Mr. Green. Thank you, sir.
Chairman Bachus. Thank you.
Thank you, Mr. Green. And the last vote is now going to be
at 1:30. They have announced they are going to close the
offices sometime before 4:00.
Mr. Neugebauer.
Mr. Neugebauer. Thank you, Mr. Chairman.
This is a great panel, and I wish we were going to have
more time and could focus in more specifically on some of these
issues.
But, Professor Scott, one of the things that I heard you
say a while ago was about the regulatory agencies doing some
kind of cost-benefit analysis kind of before they get into the
rulemaking process. And I think I heard you also say that you
thought that they ought to have possibly a comment period on
the analysis before they moved into the rulemaking process. I
think that is a good idea, and I think that is, in the future,
one of the things that may be something we may want to embed
into the legislation. Would you agree that that would be
beneficial?
Mr. Scott. Yes, I do agree with that. The way the process
works is when an agency proposes a rule, if it were to work
correctly, they would do a cost-benefit analysis to justify the
proposal that they were putting forward. We do build into our
system comment periods on proposals. So insofar as cost-benefit
was part of that, there would be an opportunity to comment.
I think a key part of what I am saying is we should have an
expert comment on that, which is OIRA. It is part of OMB. It is
their duty to comment on cost-benefit analysis done by the non-
independent agencies under current executive order. I think
that should be expanded. They should comment on the independent
agency's cost-benefit analysis, but with a difference from the
non-independent agencies, that comment would not be binding. So
we would preserve the independence of the agency to take those
views into account, do with them what they might.
Mr. Neugebauer. I think one of the things that many of us
are concerned with is we had a CBO estimate of what it was
going to cost to stand up Dodd-Frank. Chairman Bachus and I are
going to send a letter today to all these agencies that were
impacted by Dodd-Frank to actually get them to furnish us a
financial model of what they think implementation costs are
going to be and continuing costs are going to be for this
pretty massive blanket of new regulation. And I think that is
appropriate. I wish maybe we would have done that in a little
bit more detail before we got here.
And when we talk about jobs, we need to get back to that.
But when I look at Dodd-Frank, and I am going to ask the panel
to respond, can you point to a provision in any of Dodd-Frank
that made capital more available, that it made it more
accessible, and that it lowered the cost of capital for
companies and people who access capital? Can you point to me
where in Dodd-Frank we actually maybe accomplish something that
is important to job creation in this country, and that is
capital access and cost?
One of the things that I believe we have created in this
country--back when people were making lending decisions and
investment decisions, they were looking at credit risk,
interest rate risk. I will tell you that Congress has created a
new risk, and I think we need to start measuring it, and it is
called regulatory risk. That entities lose their propensity for
innovation or providing certain kind of products with some
concern that they are going to somehow--either there will be a
regulation down the road that will prevent them from continuing
that business model or, even worse, that whatever road they
have gone down, somehow somebody interprets a regulation that
that is not appropriate.
So, Dr. Poole, I will start with you.
Mr. Poole. I do not believe that Dodd-Frank was
constructive legislation--and that it missed the biggest
problem--two biggest problems; one is obviously Fannie and
Freddie, and the other is a frontal attack on ``too-big-to-
fail.''
Mr. Taylor. I agree with those two points, plus it does
things that really have nothing to do with the financial
crisis. I would mention the new Financial Consumer Protection
Bureau on that last.
Mr. Kohn. I think Dodd-Frank is not a perfect piece of
legislation; I don't think there has ever been such a thing.
But it, combined with the capital requirements--higher capital
requirements and better supervision--will make this financial
system safer and more resilient. So will it increase credit
tomorrow or next year? No, probably not. But will it help to
prevent the kind of squeeze in credit that we had last year and
the year before and the year before that? I think it reduces
the odds on that.
Mr. Scott. I am less sanguine about our capital rules than
my colleague, Dr. Kohn. This is again, as I said before, not so
much Dodd-Frank, but the Basel process over in Switzerland that
is overburdening the financial system. And I think that
Congress needs to get into the weeds on this. We can't let
Basel go on without supervision. I think it is irresponsible.
I think there are two examples where I think actually Dodd-
Frank may have improved things. First of all, I think in the
securitization process, there was a lack of disclosure as to
what the risks were on the underlying loans. And I think that
actually impeded the process, made it worse. I think Dodd-Frank
has corrected that.
I think the provision in Dodd-Frank for central clearing of
derivatives is going to reduce risk and make capital more
available. I think what would be a very good idea, Congressman,
is to do an inventory like this in a systematic way, which has
not been done. And I think your question is very well taken.
Chairman Bachus. The gentleman from New Mexico.
Mr. Pearce. Thank you, Mr. Chairman.
Again, we have 5 minutes. I don't want to cut you short,
but I am going to ask about five questions. First of all, just
in response to how many jobs we can cut or how much spending we
can cut without hurting the economy, New Zealand tried this
back some years ago, and they cut 63,000 jobs out of one
department, from 63,000 down to 1, and their economy jumped
from the bottom third of the world's economies to the top
third.
So, on the questions, first of all, I think, Mr. Taylor,
the Federal Reserve started in 2008, October of 2008, paying
interest on reserves, IORs. To me, that looks like that is one
of the regulations that is somewhat impeding growth because it
is causing banks, giving banks reasons that they would not to
lend money; instead, they would hold it in the safe harbor of
reserves. Is that a correct viewpoint? Is that the one that is
incorrect? Should we reconsider that policy?
Mr. Taylor. The rate is quite low at this point. I would be
more concerned when rates get higher, what is going to happen
with that--at this point--but now it seems to me that would be
something to focus on as a problem.
Mr. Pearce. We are losing the entire multiplier effect when
we hold those bank reserves drawing interest.
Mr. Taylor. When the Federal Reserve does begin to have to
raise rates, I think it is important for them to go back to the
strategy they used to have, which does not necessarily entail
paying interest on reserves.
Mr. Pearce. Mr. Poole, you talked about Medicare as being a
problem. Has anyone to your knowledge ever done a study--I have
talked to doctors who tell me for their time, they get maybe
$15, $20 for seeing a patient. Is there anyone who has ever
taken a look per transaction in the medical doctor's office how
much the bureaucracy in Washington actually charges and
receives? If we are paying the doctors $15, I would guess we
are paying close to $100 a visit. Is there anyone who has
actually quantified that?
Mr. Poole. I am not an expert on health care--
Mr. Pearce. You mentioned it. I am not asking you to be an
expert. Is there someone who has quantified anything like that?
You go into great detail, is the reason I am asking you. You go
into great detail about Medicare.
Mr. Poole. I don't know the answer to that.
Mr. Pearce. You don't the answer to that. If you find that,
I would appreciate knowing. I suspect we pay the bureaucrats
far more per transaction than they pay the doctors, which, to
me, is upside-down.
Mr. Kohn, with the printing of money that the Federal
Reserve has done, is there a risk in your opinion of inflation
or hyperinflation in the near future?
Mr. Kohn. No, not of inflation or hyperinflation in the
near future. There is an inflation risk over the longer run.
Mr. Pearce. You said no. I am willing to take no. They are
seeing extraordinary inflation in China and other countries in
food right now. The price of gold has skyrocketed in the last
year. The price of silver has almost doubled in the last year.
Are those not signs that the dollar is losing confidence?
Mr. Kohn. I don't think so.
Mr. Pearce. Okay. That is fine. You don't think so. I am
really pressed for time. You don't think so, that is fine.
Mr. Scott, you mentioned on page 14 that you believe the
Federal Reserve has the expertise for making such decisions as
blah, blah, blah, whatever is in your report, and yet when I
look at the Federal Reserve, I asked Mr. Greenspan in this room
before he left, and I asked Mr. Bernanke, ``Don't you think the
hedge funds are causing us great uncertainty, maybe the
instability of our entire economy?'' Both dismissed that. So we
had long-term capital as a pre-warner, and then we had the
collapse of the rating institutions and the insuring
institutions before the major collapse.
With all the expertise that you have put in the Federal
Reserve, why do you think that they decided not to do anything?
You declared that you believe in them. You declared that they
do it. Why do you believe they ignored the warning signs?
Long-term capital collapse, are you familiar with that
collapse?
Mr. Scott. Yes.
Mr. Pearce. And the collapse of the rating institutions, we
had four insuring institutions that collapsed about a year
before we took those TARP votes, which I opposed. So any idea,
as you place a great amount of faith in the Federal Reserve,
any ideas why they may be, with all the expertise you attribute
to them, they didn't get the thing right?
Mr. Scott. I can't answer that.
Mr. Pearce. You can't answer that. Would you speculate that
Dodd-Frank is really dealing--there are many things that deal
with derivatives and the hedge funds in Dodd-Frank. If we
created a stable currency by stopping the printing of money,
don't you think that many of the things that we need to
regulate--and your presentation deals greatly with the
regulatory process--don't you think those regulatory
requirements disappear, to an extent, if we create a stable
currency, one with value that is stable over a long period?
Mr. Scott. No.
Mr. Pearce. No. So hedge funds--you would be required to
need a hedge fund if you had a stable currency. I think maybe a
little bit differently.
Mr. Chairman, thanks for the time.
Chairman Bachus. Thank you.
The gentleman from Connecticut.
Mr. Himes. Thank you, Mr. Chairman.
I have been sitting here listening a little incredulously
to the discussion on debt, which is not unimportant, but of
course, there is nothing about this committee that has
jurisdiction over either the revenue side of that or the
appropriation side of that.
Nonetheless, I take very seriously what I might call the
consensus at the table that this is a very serious issue. We
heard it from the President last night. We are, I think,
developing a consensus in this Chamber that we need to address
it in a serious way.
Though I do have questions that are germane to the activity
of this committee, I do want to take a minute or two to pursue
the future of debt. Looking back, we pursued Keynesian policies
in the last couple of years.
Professor Taylor, if we had more time I would ask you why
you considered those deviant as opposed to orthodox. Of course,
10 years prior, we added entitlements in Medicare, fought wars,
and cut taxes in ways that led to where we are today.
But I want to look forward and just ask questions here, yes
or no questions. I have been watching the policies proposed by
the Minority. And let's just take the two landmark policies, if
you will. One is an extension of the 2001 and 2003 tax cuts
which the Congressional Budget Office, which is nonpartisan,
tells us is probably $4 trillion in deficit over 10 years. Now
I understand that they may be off. They may be off by some. But
does anybody on the panel here fundamentally think that the CBO
is dead wrong about the $4 trillion over 10 years?
Okay, I don't see anybody saying that.
The Republican Study Committee has said and proposed $2.5
trillion in cuts over 10 years. And we will talk about that.
That is going to be a difficult thing. We do need to cut. I
applaud their effort. I am sure I am going to disagree with
things. But let's just accept that they can get $2.5 trillion.
Now here is where I need the economists: Help me with my
math; 10 years, $4 trillion minus $2.5 trillion. Can I conclude
that the two hallmark proposals of the Majority will add, over
10, years $1.5 trillion to the Federal debt? Anybody disagree
with that math? No.
Does anybody support--and I heard you, Dr. Poole and
Professor Taylor in particular, on the urgency of addressing
this--does anybody support those two policies in combination as
things that this Congress should do?
Mr. Taylor. The policy, it seems to me, is consistent with
Professor Poole, is to get this deficit down and have CBO score
a reduction in the debt rather than an explosion. And I think
you can do that without any tax increases. I think it is very
possible to get spending back to where it was in 2008, as is
being proposed. And, moreover, I think as a share of GDP, there
is no reason why we can't--
Mr. Himes. But, Professor Taylor, time is short. You didn't
disagree with the CBO estimate. And you--we are all accepting
that there can be $2.5 trillion. We are stipulating that, not
accepting it. So we are all agreeing that we are going to see
an expansion of the deficit by $1.5 trillion. My question was:
If those two policies in isolation were the two things we got
done, would you be supportive of those two things?
Mr. Taylor. When you say expansion, our current tax rates--
we have--just been extended for 2 years. I think it would be
good to just continue that permanently.
Mr. Himes. And accept the--
Mr. Taylor. When you say what are revenues going to be,
revenues are not the problem. Those are the same revenues we
are getting now. Where is the loss of revenues relative to some
hypothetical of tax increases?
Mr. Himes. So, over 10 years, if we extend beyond the 2-
year period in which we have extended the 2001 and 2003 tax
cuts, there is a revenue effect that the CBO has estimated over
10 years. Granted, we have already taken a trillion of that,
which is $4 trillion. That is my logic. You didn't disagree
with me that $1.5 trillion is added to the deficit if those are
the two policies that we enact.
I want to come back because I actually have--this is not
germane to this committee. I actually have a few questions that
are germane.
Dr. Poole, I am very interested in something you said about
the possibility that the private market could fully substitute
for the activities of Fannie Mae and Freddie Mac. The people I
have talked to suggest that the 30-year fix, the refundable,
long-term piece of paper, probably doesn't exist in the market,
or, if it does, it exists at a very substantial premium to what
it exists today. No government guarantee on the 30-year fix. Do
you agree with that? And if so, do you have an estimate for how
much more expensive the 30-year fixed mortgage is if there is
no government guarantee or implicit subsidy?
Mr. Poole. I don't have that estimate, but I will tell you
this: If it is dramatically more expensive and you want to
propose that it be guaranteed by the Federal Government, then
it is the taxpayers who are picking up that cost.
Mr. Himes. Agreed. But we could take the policy decision
to, if you will, implicitly subsidize, as we have, the
existence of a 30-year fixed piece of paper. I am just curious
about what the effect is on the availability of the 30-year
fix, which, let's face it, it is mom, apple pie, and core to
American families. What is the pricing effect if we take away
all government subsidy and intervention in that market?
Mr. Poole. The mortgage market works just fine in other
countries that do not have GSE-type institutions. And I don't
know why you should conclude that the mortgage market can't
work here; that there is something special about the United
States' mortgage market.
Mr. Himes. Does the 30-year fixed mortgage exist in those
countries?
Dr. Kohn, you are nodding ``no.''
Mr. Poole. Probably not as extensive as the United States.
Mr. Himes. My time has expired.
Mr. Poole. The 30-year mortgage is actually typically not
outstanding for anything close to 30 years. Most people are
repaying them in about 7 years, anyway.
Mr. Himes. Thank you.
Mr. Chairman, I yield back.
Chairman Bachus. Thank you.
Mr. Duffy.
Mr. Duffy. Thank you, Mr. Chairman. I just need to follow
up on a few points that my colleague from Connecticut made. He
is talking about increasing taxes, and he is looking at the
amount of money that, if we increase taxes, would come into
Federal coffers, I believe. Is there a correlation between the
amount of taxes an investor may pay and the decisions they make
to invest in their businesses or ideas? And I guess I will
throw that to you, Dr. Poole.
Mr. Poole. The answer is, of course. That is a no-brainer.
Of course there is, because taxes affect the rate of return on
an investment.
Mr. Duffy. So it is fair to say that we aren't going to
look at the same GDP pie and say, if we raise taxes by 4
percent on a certain segment, we are going to be drawing from
the same size of GDP. That very well may shrink because there
is not enough--there is not as much investment, there are not
as many jobs. There is not as much economic activity.
Mr. Himes. Will the gentleman yield for 5 seconds?
Mr. Duffy. No.
Mr. Poole. I am not in favor of tax increases as--following
my colleague here, John Taylor. But my emphasis above all is
that tax increases cannot solve the problem. If we do not go
full-bore on the spending side, we can't solve the problem. I
would be willing, if you had a grand compromise, possibly,
depending on the nature of it, to accept some tax increases.
But if Congress keeps coming back to tax increases to solve our
problem, that solution will not work. It will fail.
Mr. Duffy. I would agree with you. Did you hear the State
of the Union speech last night?
Mr. Poole. Yes.
Mr. Duffy. The President had proposed we cap spending at
current levels as a way to get our budget under control. Do you
think that is a sound plan to get our budget under control?
Mr. Poole. I do not because I think that--it depends on
what spending you are talking about. I suppose that he is
talking only about so-called discretionary spending.
Mr. Duffy. I think he was, yes.
Mr. Poole. There are essential functions of government that
are financed that way, such as the work of Congress, the court
system, national defense, the maintenance of domestic law and
order, and if we do not tackle the entitlements, then we are
going to fail.
Mr. Duffy. Yes. I am going to pivot here quickly. I think
most of the folks in America here when they looked at this
finance reform bill, or Dodd-Frank, they were concerned that it
didn't address Fannie and Freddie. There was some outcry in
northern Wisconsin especially. And I think folks are concerned
about having a government backstop to these organizations.
I have also heard, though, if we privatize Fannie and
Freddie, there is a concern for what happens to our 30-year
fixed rates, our mortgage rates, and also what that does to our
housing market. Would any of the panel members speak to whether
you favor privatizing Fannie and Freddie and what that would do
to 30-year fixed rates?
Mr. Poole. I am absolutely opposed to privatizing them,
because it would put them back--after all, they were private
companies before they were ``conserved.'' But they had such
strong political ties that they ended up costing the American
taxpayer a huge amount of money. And I would not want to risk
that happening again.
Mr. Duffy. Okay. Anyone else?
Mr. Taylor. I like this idea of gradually phasing them out
through changing the conforming loan limits. I think that is a
good way to proceed. Otherwise, you could slow it down a little
bit if you are worried about some of the particular mortgages,
but I think we should do that.
Mr. Kohn. I think we should constrain the role of Fannie
and Freddie. I don't think they should be allowed to be
portfolio lenders, for example. I think the Congress needs to
think carefully about whether it wants to encourage home
ownership among certain classes of folks, and a new, smaller
Fannie and Freddie that was funded by insurance charges, for
example, on the users might be part of that thing. I do also
think we need to separate concerns about affordable housing
from these entities. I think conflating those is part of what
led to things. So address affordable housing separately.
Mr. Duffy. Is there a correlation now with 30-year fixed
rates and the implicit belief that government is backing up
these loans?
Mr. Poole. Not necessarily. That wouldn't have to be the
case.
And, incidentally, locking people into 30-year mortgages is
not necessarily a good idea because it may reduce their job
mobility. So I would let people make that choice themselves. I
don't understand why the government should subsidize it and
encourage people to go one direction or another.
Mr. Duffy. Very well. Thank you very much. I appreciate it.
I yield back.
Chairman Bachus. Thank you. Our final questions will come
from--no, we have two more members.
Mr. Canseco.
Mr. Canseco. Thank you very much, Mr. Speaker.
These questions are directed to Professor Scott regarding
Dodd-Frank. Dodd-Frank hands over even more regulatory power to
the SEC and to the FDIC and to the Federal Reserve. These are
the same agencies who were in charge during the last 10 years.
Yet, during that timeframe, we have seen gigantic accounting
scandals, such as Enron and Worldcom; billion-dollar Ponzi
schemes, Madoff and Stanford; and a mortgage meltdown that has
left millions of Americans unemployed and wondering if they
will be able to pay their bills.
The regulation was there. The money was there. But
regulation failed. And now we have given even more power to a
lot of these same agencies that failed the American people this
last decade. Do we have any reason to think, in your opinion,
that more rules and more money will produce a different outcome
this time?
Mr. Scott. I would like to think we learn by experience,
Congressman. I think many of these agencies have learned
lessons from these crises, and hopefully things will be
improved.
But I believe fundamentally that what has been lacking in
the rulemaking process of these agencies is any serious cost-
benefit analysis. And I think it is incumbent upon the Congress
to charge them with doing this.
Mr. Canseco. Has recent legislation really altered the
underlying structure of our regulatory agencies, which is what
really needed to be changed?
Mr. Scott. Structure?
Mr. Canseco. Yes.
Mr. Scott. Yes, absolutely. I commented on this in my
written testimony. FSOC is not the answer to our structural
problem. The President talked last night about reforming the
Federal Government structure. Part of that Federal Government
is the financial regulators. And since Secretary Paulson issued
his Blueprint, our committee has issued recommendations for
serious consolidation.
I don't think--if you have the best policies in the world
and you don't have a good way of implementing them, they are
not going to work. And I think we failed on that. Dodd-Frank
did not accomplish a real fundamental change in the regulatory
structure our financial system has desperately needed.
Mr. Canseco. Let me move into a little different area of
Dodd-Frank.
I come from Texas, and I have a huge swath of a lot of
small towns, hamlets, and villages all through West Texas. In
November of 2007, one month before the recession began, the
unemployment rate in the United States was 4.7 percent. Today,
it has actually doubled to 9.4 percent. Small businesses have
been hit the hardest. According to the Small Business
Administration, firms that employ fewer than 100 workers
account for about 35 percent of the workers in our economy.
In my district, which is the 23rd District of Texas, these
companies are often financed by small community banks. And,
unfortunately, it is these small community banks so vital to
our economy that will suffer the most from overregulation, such
as Pecos County State bank in Fort Stockton, Texas. It takes in
over 50 percent of its deposits in the Fort Stockton area.
Before the passage of Dodd-Frank, their annual audit cost them
$30,000 to complete. And they have informed me that now it
costs them over $112,000 to perform the same audit because of
all these new regulations.
Regulators have continually said small banks should not be
overburdened, yet they are. Do you believe the supposed
benefits that have come from Dodd-Frank, aside from what you
have just alluded to, outweigh these costs to small banks that
have resulted from this regulation--legislation?
Mr. Scott. Congressman, I haven't done the analysis, but I
would doubt it. There is a parallel here with SOX's 404 and its
application to small business. And we went through a long
period where everybody wanted to fully apply SOX 404 to all
businesses. But to small businesses, it was a big deal. They
had these costs, the small businesses; they couldn't afford
them. So, finally, one good feature of Dodd-Frank for sure is a
permanent exemption of the small business from part of 404.
So I think we need to take a serious look at how all these
regulations are, as part of our cost-benefit analysis,
impacting small business. Because that is where our economy
starts, with small business.
Mr. Canseco. Ergo, a bad regulation.
Mr. Scott. Yes.
Mr. Canseco. I yield back the balance of my time.
Chairman Bachus. Thank you.
The gentleman from Ohio, Mr. Stivers.
Mr. Stivers. Thank you, Mr. Chairman.
I just want to follow up on a question from the gentleman
from Texas and something that Professor Scott has been talking
about all day. Does anybody on the panel have any reason why
all these independent agencies should not perform a basic cost-
benefit analysis?
Thank you.
The second question I have is for Dr. Taylor.
Dr. Taylor, you talked about how private investment--and
you had the graph about how private investment drives our
economy. And with businesses sitting on more retained earnings
than any time in the last 50 years, is there a prescription to
help them take that cash they are sitting on that obviously has
the potential to create jobs and help them do that?
And please try to be brief.
Mr. Taylor. This uncertainty out there, which is continuing
partly just because the economy is still--recovering is still
somewhat still fragile, but in addition, I think all these
regulatory issues, the uncertainty about what is going to
happen with the debt, uncertainty about what is going to happen
with taxes, uncertainty about regulations, uncertainty about
monetary policy, I think those are all factors that could be
addressed and would lead to a more healthy attitude about
investing.
Mr. Stivers. Thank you.
Something Dr. Kohn said earlier I want to kind of address
to the whole panel. Doesn't innovation help encourage demand?
In fact, it is the psychology of demand. I would use the iPad
as an example. I don't know if any of you own an iPad, but that
is something that was just an idea a year and a half ago, and
now everybody owns one.
I guess I will put it to Dr. Poole--or Dr. Kohn, since you
have said it before, does innovation help create demand?
Mr. Kohn. Of course it does. New products, new innovations,
new ways of doing things help increase productivity, and over
time, productivity increases demand and living standards.
Mr. Stivers. Thank you.
To Professor Scott, you talked a little bit about--your
third or fourth point was about regulatory reform. And I can
count seven agencies if you are a big financial institution:
the SOC, the SEC, the FDIC, the Federal Reserve, the new Bureau
of Financial Protection; and the OCC. I don't know if I missed
anybody. I think that is seven. And with the 200 new
regulations that are coming in Dodd-Frank, if any of them are
in conflict, how do these companies deal with this?
Mr. Scott. The answer is, not well. FSOC has limited
authority in some instances to try to reconcile differences
between the age-old fight between the SEC, and the CFTC was
granted some kind of muscle. But apart from that, we have seen
the FDIC, for instance, disagree with the SEC on securitization
issues, retention questions. This is going to go on.
Mr. Stivers. Doesn't that actually reduce the ability to
get capital to businesses and create jobs?
Mr. Scott. Absolutely. Dysfunctional regulators are not
helping our economy.
Mr. Stivers. Thank you. One other question that I had was,
I talked to a banker, a small community banker from First
Community Bank, Roger Blair, in my area. He told me a story
about a regulator. He has a gentleman who borrowed money for a
commercial building 5 years ago. He has never been a day late
on a payment. The cash flows are exactly the same. The building
is leased the way it was at the beginning. The appraised value
has gone down, obviously, by about 50 percent. And the
regulators came in and made him write that loan down by 50
percent. So every month when the man makes his payment, Roger
has to basically find profit against a bad debt. Doesn't that
reduce the amount that First Community Bank that Roger Blair is
the CEO of has available to lend.
Dr. Poole?
Mr. Poole. The answer is yes. But we do need to be careful
about picking out particular cases, because you need to look at
regulation--
Mr. Stivers. Let me ask you a follow-up question. I totally
understand. Do bankers make loans on cash flow, or do the
bankers make loans on loan-to-value? Because my grandfather was
a banker. He made it on loan-to-value. My father was a banker.
He made it on cash flow. And I am pretty sure the bankers today
make it on cash flow.
How do bankers make loans today?
Mr. Poole. The problem with doing it only on cash flow is
that if you have good reason to believe that the cash flow is
going to stop, then the loan may be in trouble.
Mr. Stivers. I understand. But what really determines
whether a loan can be paid back?
Mr. Poole. Obviously, the cash flow.
Mr. Stivers. Thank you. I have just one last question. This
is for the entire panel. Do we have a revenue problem in this
country, or do we have a spending problem?
Mr. Poole. I have said over and over again, spending.
Mr. Taylor. Spending.
Mr. Kohn. Entitlements.
Mr. Stivers. That is a good point.
Mr. Scott. I plead ignorance. I am not the economist on the
panel.
Mr. Stivers. Thank you.
I yield back.
Chairman Bachus. Thank you.
Mr. Schweikert.
Mr. Schweikert. Thank you, Mr. Chairman.
I don't want this to come across as too esoteric. When we
look at the debt overhang, whether it be nonperforming
mortgages or the nonperforming assets, how much of a hindrance,
in your opinions, is that to economic growth and job creation?
I have been spending a lot of time looking at the amount of MBS
out there, other assets that are not performing but are still
sitting on our books. What is that doing to us growth wise?
Mr. Kohn. On the books of banks, for example?
Mr. Schweikert. Banks, or even within the secondary
markets.
Mr. Kohn. So I think certainly the increase in
nonperforming loans and problem loans took capital away from
banks. They needed to reserve for it, and it probably made them
much more cautious in lending. I think there is some sense now
that things are beginning to peak out and that, as the economy
recovers, nonperforming loans would go down. And as I think one
of your colleagues pointed out before, some of the more recent
information from the Federal Reserve is that banks are becoming
a little more aggressive in making those loans. Certainly, the
increase in bad loans was a problem for banks that they needed
to address. And that probably impinged on their ability to make
loans for a while.
Mr. Schweikert. Mr. Chairman, where I am partially heading
with that is I am still stunned how much is still sitting on
the books or is in the process of still moving into,
particularly for myself, who focuses often on the real estate
market, the amount that is delinquent but not actually
technically in foreclosure.
Just in my county, Maricopa County in Arizona, I have
50,000 residential units that have been notified of
foreclosure, and it is often said there may be 2, 2\1/2\ times
that many that should have been notified.
Mr. Kohn. I think moving through this problem quickly is
one of the things that will help to reduce uncertainty, but it
is a very difficult problem, given all the servicing that is
scattered, the second mortgages, etc. But I agree that this
overhang, the so-called shadow inventory of homes that might be
foreclosed against or probably will be foreclosed against, is
hanging over the housing market and impeding the recovery of
that market.
Mr. Poole. And will likely for some years to come. It is
just a very big problem we dug for ourselves.
Mr. Schweikert. Mr. Chairman, the last part.
Does anyone have a brilliant suggestion on how we push this
nonperforming overhang through the system; how we incentivize
both lenders, secondary holders, whoever it may be, to help us
chew this up? Because we are turning what appears to be a few-
year real estate depression and we are going to make it last
well over a decade unless we get this off our books.
Mr. Poole. I will just take a quick stab at that. I think
we need to let that be done primarily in the private sector. I
think the efforts of government to get into that business have
simply not been very successful. And as I look at the numbers,
the number of foreclosures that are assisted in some way by the
Federal programs is simply not going to the heart of the
problem.
Mr. Kohn. I don't have any suggestions. It is a very
difficult problem. The private sector is bringing more
resources to bear on this issue. I think they are concerned
about litigation, obviously. I don't have any quick answers to
this very difficult problem.
Mr. Schweikert. Mr. Chairman, thank you very much. Many of
us believe, unless we can push through much of this
nonperforming inventory, we are never going to hit our true
bottom and never going to start to work our way back up.
Chairman Bachus. Thank you.
The first panel is dismissed. We appreciate your testimony.
The Chair notes for the hearing record that members will
have 30 days to submit additional questions to this panel.
At this time, I will recognize Ms. Waters for an unanimous
consent request.
Ms. Waters. Mr. Chairman, I have an unanimous consent
request to enter two statements in the record, one from the
National Low Income Housing Coalition and the other from the
Credit Union National Association.
Chairman Bachus. Thank you.
I also have an unanimous consent request that we introduce
a letter from the Associated Builders and Contractors.
If there is no objection to either request, they are so
granted.
We welcome the second panel. Thank you.
I would like to take this opportunity to introduce one of
the witnesses today who is a former intern of mine, a
congressional intern, Eric Hoffman. His mother, back in, what
was it, 1998--
Mr. Hoffman. That is correct.
Chairman Bachus. --mortgaged her house and started a small
business, which today is Hoffman Media, and has a staff of 135
and net sales or revenue of $42 million and publishes several
magazines. Eric, once he graduated from the university, joined
that office. He had, about a month and a half ago, called
concerning some of the regulations that we had passed and how
he was afraid that it would affect their funding going forward.
So, we will listen to his testimony.
One of our other witnesses, Mr. Charles Maddy, is president
and executive officer of Summit Financial Group. Located in--is
that in Kansas?
Mr. Maddy. West Virginia.
Chairman Bachus. Mr. Andrew Bursky, managing partner of
Atlas Holdings. Where is that located?
Mr. Bursky. In Greenwich, Connecticut.
Chairman Bachus. Mr. Ken Brody, partner, Taconic Capital.
Where is that located?
Mr. Brody. New York City.
We welcome all four of you gentlemen. Somebody had a flight
at 4 o'clock, or was that the first panel? So we will be
through by that time.
So we will start, Mr. Hoffman, with your testimony.
STATEMENTS OF ERIC HOFFMAN, EXECUTIVE VICE PRESIDENT AND CHIEF
OPERATIONS OFFICER, HOFFMAN MEDIA, LLC
Mr. Hoffman. Great.
I want to begin by thanking Chairman Bachus and the members
of the Committee on Financial Services for the invitation to
speak today.
I have had the privilege to work at our family business,
Hoffman Media, and be part of an incredible growth story. As I
strategize about both our company's continued growth as well as
small business growth across the United States, I am concerned
by recent changes in financial regulation, health care, and
taxes.
In this testimony, I will share with you the history of
Hoffman Media; the concerns that I have on the Volcker Rule and
long-term negative effects on small business and growth; and
concerns of future burdens caused by health care reform and
higher taxes.
Overall, I am concerned that the significant changes we are
seeing will hurt our future ability to grow, as uncertainty is
the worst headwind we face. I remember President Obama said
last night that we can do big things. It is possible to do big
things, but uncertainty prevents that.
Hoffman Media was founded in 1998 by my mother, Phyllis
Hoffman, who currently serves as chairman and CEO. After
successfully working for 5 years at a large publicly-traded
company, she left the business. She acquired two magazines and
financed the startup by mortgaging her house, a true sign of an
entrepreneur.
From 1998 to 2003, the company ran on an extremely tight
budget, whereby all operating profits were reinvested in the
business to fund continued growth through the launching of new
magazine brands. In 2003, the company had approximately 20
employees and generated approximately $4 million of sales. It
was during this period that Phyllis decided in order to
properly fund growth and scale the company both through organic
growth and acquisition, that Hoffman Media would need to raise
capital.
Since Hoffman Media was not producing net income, it
prevented the company from accessing traditional commercial
lending from a bank. And after a 24-month search, interviewing
private equity funds, Hoffman Media successfully raised $5
million from BIA Digital Partners and Frontier Capital. This
capital raised allowed Hoffman Media to complete a strategic
acquisition of a complementary business and fund additional
marketing and hiring needs.
From the period of 2004 to 2010, the company has scaled,
growing revenue from approximately $10 million to $40 million,
while also growing our employee count from 20 to 135. The
capital raised is worth explaining further. BIA Digital
Partners provided mezzanine debt with warrants to the company,
which Hoffman Media successfully paid back in 2009. The outcome
was a win for all parties involved: it was a win for Hoffman
Media; it was a win for the private equity firm; and it was a
win for the LPs.
I want to point out that half of the fund's LPs are banks,
large national banks, some of the best institutions in the
land. And I will go as far as saying that Hoffman Media would
not be where we are today had it not been for the support of
both BIA and also their LP support, which included banks.
The Volcker Rule's proposed limitation on banks being
owners in or holding equity in hedge funds and private equity
firms concerns me in that if it is done away with altogether or
it is limited to roughly 3 percent of tier 1 capital, which I
believe is proposed, I fear this could lead to a substantial
decrease in the funding that supports private equity, in
particular, those covering the lower middle market.
If the pie gets smaller and banks can only invest a small
portion of their capital, my fear is that it will only reach
the larger buyout funds and not the lower middle market. The
total economics of those relationships with the larger buyout
funds are obviously more important. However, the value created
in larger private equity is generally done through leverage,
dividending out excess cash, cutting costs, taking companies
private, and then returning them to the public market later.
Firms like Hoffman Media can obviously show that a private
equity investment works. It works for us. We have grown a real
sustainable business. We are now producing substantial sales
tax that impacts the local sales levels. We generate taxable
income. We have 135 people who are impacting our local economy
every day by paying their mortgages, buying groceries, etc.
My biggest concern is that if companies like Hoffman Media
have additional hurdles that are put in place to prevent us
from growing, it is going to slow down this economic recovery,
I have no doubt. This recovery will come from small business.
And it is businesses like ours. We have entrepreneurs who take
risks, go after their dreams. And then when they scale and need
that capital, if they can't get it from a traditional bank,
which is incredibly difficult to do--we have tried, and it took
us years to finally work with a traditional bank--it will have
big negative impact on the recovery.
In passing, I will say health care reform and higher taxes
are also hurdles that can potentially slow down the economy. I
know that as we produce profits, if the cost of our profit goes
up by tax rates or our costs of operating goes up with health
care costs, that directly steals money off the bottom line. And
one of the Congressmen earlier said that millionaires don't
produce jobs. The fact of the matter is if a millionaire is
given another million dollars, they reinvest it. They don't put
it in their pocket. And we are an example of that.
So, in closing, I believe that the story of Hoffman Media
is compelling. I urge the Members of Congress to pay close
attention to our story because there are thousands of companies
just like Hoffman Media out there. We don't want to put
limitations on our banks. The fact of the matter is if they
want to invest in smaller private equity firms or large buyout
funds, it is their choice, but let's not limit the capital that
is flowing down the lower middle market because that is where a
significant amount of jobs will be created. Thank you very
much.
[The prepared statement of Mr. Hoffman can be found on page
72 of the appendix.]
Chairman Bachus. Mr. Maddy.
STATEMENT OF H. CHARLES MADDY, III, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, SUMMIT FINANCIAL GROUP
Mr. Maddy. Chairman Bachus, members of the committee, my
name is Charlie Maddy. I am president and CEO of Summit
Financial Group. My bank serves communities located in south
central and the eastern panhandle of West Virginia, as well as
in the Shenandoah Valley and northern regions of Virginia.
Summit Community Bank has more than a half billion dollars
in small business loans. We contribute a quarter million
dollars to our schools and nonprofit and community
organizations annually, and our employees volunteer thousands
of hours to support our schools, nonprofit organizations, and
charities. We are very proud of the relationships that we have
with our customers and community. They are our friends and
neighbors, and our success is linked to their success.
We now have the benefit of history, which clearly shows
that community banks were not responsible for the great
recession we are currently experiencing. However, banks like
mine continue to be subjected to intense regulatory scrutiny.
Calls for expensive and scarce capital and pressure to add
compliance staff to deal with all the new regulations are
currently plaguing us.
How can I be out in my community helping someone improve
their quality of life or helping a small business grow if all I
do is deal with the aftermath of problems that I did not
create?
Let me give you a bit of perspective on this. We used to
all know where we stood with capital rules. We could plan for
growth and make new loans without being criticized for having
too little capital. This has all changed. Banks are being asked
to raise capital, in some cases, even if they are well managed
and have no significant asset quality problems.
Most importantly, there is no clarity on how much capital
is required. It has clearly become a moving target. This
uncertainty, combined with pressure to raise new capital, makes
it hard to grow and seek new lending opportunities. Please keep
in mind that the most efficient way to raise the capital ratio
in one's financial institution is to simply shrink the size of
your assets, including your loan balances.
Another disturbing trend is that the new standards are
being applied to banks without having a clear understanding of
what they are. Banks should at least be told what ratios
examiners are using as standards. Moreover, what used to be
guidance is now being enforced as if there were hard and fast
rules. In our case, the bright-line test currently being
applied will reduce our ability to make new commercial real
estate loans by over $100 million.
The regulators in Washington seem intent on twisting the
screws tighter and tighter. After all, regulators do not lose
their jobs for being too tough. The time to be tough is before
an economic turndown, not after. In fact, being tough makes
things worse at this stage in the recovery. It is like adding
fertilizer to your lawn in the heat of the summer; it is only
going to kill the grass, not help it.
Regarding the Dodd-Frank Act, it will have an enormous and
negative impact on my bank. Already, there are over 1,000 pages
of new proposed rules and there will be many thousands more,
many of which will come from the Bureau of Consumer Financial
Protection. We have already added one new full time member to
our compliance staff and this may not be enough. These are
resources that won't help us make new loans in our communities.
We are also bracing for the loss of revenue from
interchange. The so-called carve-out under Dodd-Frank for
community banks won't work. Revenue from interchange is
important to my bank, as it helps offset some of the cost of
providing checking accounts to my customers. We cannot afford
to offer financial services if we cannot cover the cost of
doing so.
The people who get hurt most by these changes are the
hardworking men and women in West Virginia who earn just enough
to make ends meet. They are currently able to get most of their
basic banking services free of charge. If we lose fees like
interchange revenue, free checking and similar services are
likely to disappear for everyone. I think this is bad public
policy.
Summit Community Bank will survive these changes, but many
other community banks may not. In fact, regulators have told
some banks that if you are under $500 billion in assets, you
may want to consider merging, as you may be simply too small to
survive. This would translate to over 90 percent of all banks
headquartered in my home State of West Virginia. Higher costs,
restrictions on income, limits on new sources of capital, and
regulatory pressure to limit lending in certain sectors all
make it harder to meet the needs of our communities.
Madam Chairwoman, I truly appreciate the opportunity to be
here today and I will be happy to answer any questions that you
may have.
[The prepared statement of Mr. Maddy can be found on page
88 of the appendix.]
Mrs. Capito. [presiding] Thank you, Mr. Maddy. And I
apologize for not being here to formally introduce Charles
Maddy. I know he was introduced, but he is one of my
constituents and has been a longtime and very active banker in
our State. I thank you for your service to our State and your
community. He lives in Moorefield. He is also an executive of
the Federal Home Loan Bank of Pittsburgh, has been active with
that as well and has been a great resource for me in terms of
trying to unwind all of these issues, besides inviting me to
his bank to meet all the great folks who work in Moorefield,
which I said was not really named after me, but I will claim
the ``Moore'' part of Moorefield. So thank you, Charles.
Mr. Maddy. Thank you.
Mrs. Capito. Where we are right now is we are voting. And
so Chairman Bachus went to vote, so we can keep the hearing
going. He is going to come back and relieve me, and then I will
have to slip back out again.
So I would like to recognize our next witness, Mr. Andrew
Bursky, who is the managing partner of Atlas Holdings LLC.
Welcome.
STATEMENT OF ANDREW M. BURSKY, MANAGING PARTNER, ATLAS
HOLDINGS, LLC
Mr. Bursky. Thank you, Madam Chairwoman, and distinguished
ladies and gentlemen of the committee. I appreciate the
opportunity to address you today. I am Andrew Bursky. I started
my first business in my hometown of Indianapolis when I was 11
years old.
Today, at Atlas Holdings, I employ 5,000 individuals
directly or through the portfolio companies of my private
equity fund. These jobs are the result of three kinds of
private equity activity. We acquire struggling businesses and
rehabilitate them by investing our own capital and extensive
managerial resources. We grow businesses whose expansion had
been stunted by capital or managerial constraints, and on
occasion we will start a business and partnership with
experienced operating partners.
Our work is quite similar to that of other small to mid-
sized private equity firms, of which there are more than a
thousand in the United States. Our collective activity has been
a well documented, if not well publicized engine of growth for
the U.S. economy for more than 2 decades.
A recent study by Ernst & Young stated that 80 percent of
private equity owned businesses increased employment during the
period of PE ownership, even though most of these companies
were in mature industries or had been stress companies when
purchased.
Another study for the Center for Economic Studies found
that prior to investment private equity portfolio companies
were losing jobs at a rate of 1 to 3 percentage points faster
than their competitors. After PE investment, companies
initially experienced a dip in employment that saw employment
growth rates rise above industry averages within 4 years.
Let me briefly share with you an example of our activities
which occurred in Michigan, the State with the Nation's second
highest unemployment rate. In 2002, we became aware of a
shuttered specialty steel mill in South Lyon, Michigan. The
mill, Michigan Seamless Tube, had been profitable for 75 years,
but had fallen upon hard times as a result of problems at a
sister division and a series of management blunders.
The banks had taken over, dismissed the workforce, and were
planning on a full liquidation. In these settings, rarely will
an industry buyer appear. What is required is a private equity
investor with the experience to work through a complicated
bankruptcy and the operational skills to shepherd the business
through the process.
Working closely with the U.S. steelworkers in the State of
Michigan, we crafted a plan to restart the facility. We
committed $10 million of our own capital, enormous time, and 18
months of sleepless nights. By 2004, the business was operating
profitably and today MST employs 250 in high-paying
manufacturing jobs in a State where every job counts. As an
aside, MST ships about 20 percent of its production into highly
competitive export markets, demonstrating that well positioned
U.S. manufacturers can in fact compete globally.
In 2010, two of our three transactions were similar to
Michigan Seamless, our acquisitions of Bridgewell Resources, a
Portland Oregon-based global trading company that was being
liquidated through a Federal receivership, and Detroit
Renewable Power, a shuttered green energy from waste business
in downtown Detroit. All that kept these businesses from final
liquidation was our willingness to invest our time and money,
work cooperatively with affected parties to seek resolution to
seemingly intractable problems, and bet on our conviction that
we could undertake these challenges profitably. These two
acquisitions in 2010 have already put more than 350 people back
to work.
Occasionally, we hear of a PE-owned overleveraged business
failing or being forced to reduce employment, just as
businesses not owned by private equity firms sometimes fail.
But the work of the many small to mid-sized PE firms like mine
is focused on saving and growing businesses.
It is worth noting that a study by the private Equity
Growth Council credits private equity with preserving 185,000
jobs since January of 2008 through investments in 137 bankrupt
businesses, to say nothing for the hundreds of thousands of new
jobs created by providing capital to growing businesses.
Unfortunately, this engine of economic growth is about to
have its wings clipped as an unintended consequence of Dodd-
Frank. Harvey Pitt, former SEC Chairman, stated just last
Thursday that, ``My own belief is that private equity firms are
the engine of economic growth and we are now imposing
restrictions on them simply for the sake of restrictions.''
Shame on all of us, business people, financiers, and
legislators if we fail to learn the lessons of Madoff and the
financial crisis. So I applaud your efforts to create balanced
legislation that addresses real problems of the past. But one
important lesson of the financial meltdown is that private
equity did not contribute to systemic risk. No investors were
harmed, nor was there any lack of transparency or fraud
perpetrated on investors by any private equity fund.
We have asked the SEC to delay implementation of the Dodd-
Frank requirements on PE firms until the issues involved are
thoughtfully reassessed. No public purpose is served by
implementation but the costs are very real. We will spend
hundreds of thousands of dollars and, far more damaging, we
will reallocate our resources to registration, regulatory, and
compliance matters and away from our highly productive focus,
which has consistently created jobs for America.
Thank you very much.
[The prepared statement of Mr. Bursky can be found on page
65 of the appendix.]
Mrs. Capito. Thank you.
Next, we have Mr. Ken Brody of Taconic Capital, and where
are you located, Mr. Brody?
Mr. Brody. New York City.
Mrs. Capito. New York City. Thank you.
STATEMENT OF KENNETH D. BRODY, PARTNER, TACONIC CAPITAL
Mr. Brody. The last time I appeared before this committee
was about 3 years ago when I was a lone ranger among a whole
slew of hedge funds calling for mandatory regulation by the SEC
of all hedge funds.
Mrs. Capito. Mr. Brody, I'm sorry. I hate to do this but
since I am the only one left, and we have a vote going, could I
ask you to suspend and we will be right back?
Mr. Brody. In mid-sentence, I will. We will see you when
you come back.
Mrs. Capito. The committee will stand in recess.
[recess]
Chairman Bachus. You started your statement, you may
resume.
Mr. Brody. This is better. Here we go.
As I started out before, the last time I appeared before
this committee was 3 years ago when I was the lone ranger among
a slew of hedge funds that were asking for some upgraded
regulation of hedge funds, and specifically asking for you all
to make mandatory hedge funds registering with the SEC and then
the SEC getting better with their oversight at what they do. So
it is good to be back here again, on a different topic. I have
a few comments. They will all be focused on Dodd-Frank, but I
am open to any questions that you might have of me.
Dodd-Frank is obviously not perfect legislation. It has
flaws, but it is a step in the right direction. It is but a
part of international regulation of the financial system,
particularly Basel III, that is aimed at creating more equity
in the financial system. The goal is to have safer and duller
banks. And, so far so good, we are heading in that direction.
In the United States, lending has picked up and most
borrowers, not all, but most borrowers are getting the money
that they need. To the extent that banks are still cautious in
their lending, it is more a function of their recent history
and current economic uncertainty than Dodd-Frank.
Where certain companies can't borrow, particularly those
seeking loans based on cash flows, help is on the way. Our free
market economy works well, and there are a number of firms
looking to plug that hole because they can make money by doing
so. So I am not very concerned about the effects that Dodd-
Frank is having on the lending market in the near term.
Of course, the bureaucracy involved in writing the rules
and overseeing the rules for Dodd-Frank creates uncertainty,
but the uncertainty involved with the writing of the rules will
pass and we will end up with a sounder financial system. We
should not look to go back to where we are. It was too loose,
too liberal, and helped us land in disaster. So that is not the
right standard to say, geez, we used to do that and now we
can't do that anymore. We do need a safer banking system, and
we are well on the way to creating it.
Thank you.
[The prepared statement of Mr. Brody can be found on page
64 of the appendix.]
Chairman Bachus. Do you have any questions, Mr. Green?
Mr. Green. I will be very brief if you are going to pass,
Mr. Chairman. You are going to pass?
Chairman Bachus. I will let you go.
Mr. Green. Okay, thank you very much. And I thank the
witnesses for testifying today. As you know, we have votes and
I did miss some of your testimony, but you did submit your
testimony for the record.
Let me start by asking a very basic question. What happens
to a business that attempts to serve a clientele that doesn't
exist or tries to cater to a demand that doesn't exist?
Mr. Hoffman, would you quickly tell me what happens to such
a business? If you try to serve a demand that there is no
demand for the product, what happens to the business?
Mr. Hoffman. I think that you know there is R&D that
companies do to sort of figure that out.
Mr. Green. Let me just say this to you, Mr. Hoffman, to
help you along. It goes out of business. You can't cater to a
clientele that doesn't exist and stay in business. Businesses
stay in business because they have a demand that they satisfy.
And my point that I was making earlier that I appreciate your
addressing had to do with the fact that businesses are not
going to invest when there is not a demand or at least the
potential demand for them to meet. Innovation is a great thing.
When companies innovate, they do so in anticipation of a demand
that will be there. Demand drives these things. You don't just
do it because you have money to invest, good business people
don't.
Moving to my next point.
Mr. Hoffman. Can I respond to that?
Mr. Green. Excuse me, sir, I control the time.
Mr. Brody, is that correct?
Mr. Brody. Yes.
Mr. Green. Mr. Brody, I want to thank you for your comments
because I think that Dodd-Frank has served a meaningful purpose
as well. I am of the opinion that ``too-big-to-fail,'' nobody
wanted it, but we did have to have a means by which we could
wind down these huge institutions that were creating systemic
failure. Dodd-Frank addressed the question of systemic failure.
Is it perfect? My suspicion is, it is not, but we have at least
made an attempt to move in a positive direction with Dodd-
Frank. Just as we wind down banks when they have problems, we
go in on a Friday, shut them down and open them up on Monday,
the FDIC has a means by which this can be done. This is another
means by which we take on large institutions that can create
systemic failure. So I think that there is a lot of merit to
Dodd-Frank.
The Volcker Rule quickly, before I left, there was an
indication that someone was disenchanted with the Paul Volcker
Rule. The Rule keeps banks from using taxpayer money in
proprietary trading. Am I incorrect on that; anybody want to
differ? Okay.
Is there anything wrong with being concerned about how
taxpayers may have to bail out institutions that engage in
proprietary trading with taxpayer dollars and moving to some
means by which we try to protect taxpayer dollars? What would
we do if we had no such rule and a large institution
overextends itself and is about to fail? Mr. Hoffman, what
should we do?
Mr. Hoffman. First of all, there is a big difference in--
and you have a difference between proprietary trading and also
private equity investing. Those are two unique differences
and--
Mr. Green. I understand the difference between private
equity investing, but do you not believe that we should in some
way protect taxpayers who end up bailing out these companies?
Mr. Hoffman. I think that private companies or corporations
that are using their own capital to invest on their own
account, they use it for more than just getting risky return
rates, they do it for business development, they do it to allow
companies like Hoffman Media and thousands of examples like
ours. It gives us a chance to prove creditworthiness. So these
alternative investments help them gauge how they build their
business downstream.
Mr. Green. I understand.
Mr. Hoffman. Explain to me taxpayer dollars.
Mr. Green. Excuse me if I may, sir, since I have the
questioning time. Thank you. Should banks invest in private
equity funds?
Mr. Hoffman. Absolutely.
Mr. Green. Should there be any limit on how much they can
invest? And when they fail, what should happen, if that
happens?
Mr. Hoffman. The bank should go under.
Mr. Green. And if the bank goes under and that failure is
systemic and it impacts the entire economy, what should happen?
The economy should go under?
Mr. Hoffman. Is that what you believe?
Mr. Green. I am asking you.
Mr. Hoffman. I believe the bank should go under.
Mr. Green. Okay, the bank goes under, banks go under. The
entire economy is impacted.
Mr. Hoffman. Right.
Mr. Green. It is your opinion that is just the risk the
economy takes by letting this do this?
Mr. Hoffman. Correct.
Mr. Green. Okay. Thank you. My time is up.
Chairman Bachus. Thank you.
Mr. Maddy, you are a community banker and you kind of have
a unique view of ``too-big-to-fail'' because probably one out
of every thousand businesses is deemed ``too-small-to-save''
when you have ``too-big-to-fail.'' How does that strike you as
a banker of a smaller institution? Do you think there is any
fairness in the ``too-big-to-fail'' doctrine?
Mr. Maddy. As a small banker, and I speak for myself here
of course, not the industry, I do think that we should have
limits in place that keep institutions from being so large that
they create risks that endanger our entire economy. I don't
think that is sound policy, and I think it should be dealt
with. And I think that we can do that, we can keep these
institutions from being so large, and then we can allow them to
invest in some of these private equity situations. Then, if
they do go under, the whole process works, because it is true
capitalism, and that is my opinion.
Chairman Bachus. I think it would be true capitalism. If
you are ``too-big-to-fail,'' you are ``too-big-to-exist.''
Mr. Maddy. Right.
Chairman Bachus. And I think actually Mr. Volcker and many
of us in Congress say if our only choice is we either bail them
out or they will bring down the economy if we don't bail them
out, then they are just too big. The new report by the overseer
of the TARP has said that Dodd-Frank actually institutionalizes
``too-big-to-fail.'' So you have these institutions that are
just--``you can't let me fail, I am too big, I'll bring down
the economy.'' I think our choices are, are we going to bail
them out or we are not going to allow them to exist in that
form.
I heard your testimony and had read part of it and it is
the same conversation I have had with small banks and even
regional banks all over the country, before Dodd-Frank, even
before that, they were micromanaging your loans and second-
guessing your loan decisions. Do you believe that you are best
able to make decisions on who to loan money to and under what
terms or that a bank examiner or a regulator in Washington is
best able to do that?
Mr. Maddy. Clearly, I think that the community bankers are
in the best position to make those decisions. I would even go a
step further and point out, at least in my own experience, the
examiners who have come onsite, the people who know the area
and who have worked in those areas for years actually have been
pretty reasonable throughout this entire process. Most of the
stringent and overzealous actions have come from somewhere
above. We don't know exactly where, but it is certainly
somewhere outside of their hands, and in candid conversations
to the degree they feel comfortable even admit that, that in
some cases they don't really agree with this but this is just
how it is.
Chairman Bachus. I heard Paul Ryan use the same term I used
last week when I was appearing before the--I was on a panel
with Sheila Bair and Ben Bernanke--and that is ``American
exceptionalism.'' We in America--the whole country was founded
on the premise that we all have the freedom to succeed or fail
and we don't look to the government to direct that or to pick
winners or losers or to be there as a safety valve for a ``too-
big-to-fail'' company, that really the people are entrusted
with the ability to make choices. And then they should live
with those choices.
If you are talking about the FDIC and insurance, deposit
insurance, obviously if your underwriting standards as a whole
bring risk to that, that is one thing. This idea, and I have
talked to a community banker in Alabama, who a regulator,
examiner, and he was new, had been on the job about a year,
looked at an $8,000 car loan to an 82-year old woman whose son
owned the biggest business in the county and said the car is
not worth $8,000 and made him write it down to $6,000. Even
though the loan was current, she owned her own house, and as
the banker--and this is relationship banking. I think that
examiners and regulators ought to appreciate those
relationships and they should not violate those relationships.
And when he said to this family--I have dealt with this lady
for 30 years, her son is a customer of the bank, he is good for
it, an examiner ought to trust the business, they ought to
trust that you are in business to make a profit, not to go
broke. I think what they are doing, I hear this, that they were
too lax in the good times and you mentioned and now they want
to kind of make it up.
Mr. Maddy. Right.
Chairman Bachus. The time to be tough, I think in your
testimony, is before when there is--you were doing something
before an economic turndown, and I think that is going to be
one of our challenges, but I am not sure that we can all of a
sudden start--you can't have capitalism without capital. And
whether you reserve it under Dodd-Frank to telling end-users or
derivatives, none of which still haven't seen a case where it
caused any harm to our financial system or to those industries,
by end-users like a Southwest Airlines or a John Deere hedging
gasoline or fuel or currency. We have never seen an incident
where they did anything that caused the financial system any
concern or even that wasn't profitable to them, yet under this
new bill, they have to reserve capital for that. They will be
going into job creation. I will say there is a bipartisan
consensus building that we need to change that. I have said
before there are good things about Dodd-Frank, there are bad
things and there are ugly things, and that is one of the ugly
things.
Mr. Green. Would the Chair yield for just 30 seconds, if I
may?
Chairman Bachus. I will. You have 2\1/2\ minutes.
Mr. Green. Thank you, Mr. Chairman. I concur with you that
there is a consensus building that we can tweak and we can mend
the bill. I don't think that it is perfect. I do want to just
make note of this. In a free market economy, it is very
difficult to limit the size of private enterprise when the
businesses are desiring to grow. I don't know how we in a free
market economy will decide you are only as big as you can get
now and if you get any larger we are going to find a way to
downsize you. This is why you have to have some means by which
you can deal with those, just as a matter of fact, who are so
large that they can create systemic failure. There is no desire
to have ``too-big-to-fail.'' I don't think any business is
``too-big-to-fail.'' That is why we want to have a means by
which they can wind down when they get in a position that they
are about to fail. We don't want them to bring the economy
down, and let's let them pay for their own failure. That is
what Dodd-Frank proposes do, to put them in a position where
they have to cover their own failure.
And I am with the chairman, all businesses count. Small
banks didn't create the crisis and we ought not have them pay a
price that is unacceptable given that they were not a part of
the problem. I stand with community bankers, but we also have
to understand as a reality we had these huge conglomerates that
were so large that they were impacting the entire economy. What
do you do with them? That is what we--and we have tried to do
something with them. And Mr. Chairman, thank you. You have been
very generous with the time.
Chairman Bachus. Actually, we have additional time, and we
have a little time on the Floor. So if you want to ask an
additional question, I think I will follow up.
Mr. Green. I will go to Mr. Brody and I am going to ask
that we make those names a little bit larger just for those of
us who are still trying to read without our glasses. I think it
is Brody, I can't quite see it.
Mr. Brody, would you do this, in the absence of the
mechanics in Dodd-Frank, what will we do in the future when we
have these huge companies that may create systemic failure?
Mr. Brody. The first thing that we do is what we are
starting to do. First of all, it is the financial system that
is the key to systemic failure. Most other companies can fail
and don't have the interrelationships that causes systemic
problems.
With the big financial companies, the thing that you all
are doing with Dodd-Frank and which Basel III will do is it is
making these banks safer, basically safer and duller, by having
them have more equity and engage in fewer volatile operations.
So that is a big part, is to make it much more difficult for
them to fail, and that is the direction that we are headed in
and that is a good thing. That has other consequences but the
world is about a tradeoff, and that is probably the key thing
to look at going forward.
With respect to--in spite of everything, what happens if
there is a big systemic failure, you need to have a system in
place which allows for a gentle, not-disturbing-the-rest-of-
the-world system that can help unwind it. One of the things you
can do short of unwinding it is to attack the capital issues by
having various forms of debt take hits, to basically have the
institution save itself by being able to increase its equity by
moving debt into equity, and there are bunches of efforts on
that score going on around the world and that will probably end
up being a big solution to the problem.
Chairman Bachus. Thank you. Let me follow up with one
question to our community bank representative. Interchange
fees, how will that affect your bottom line and that of most
community banks?
Mr. Maddy. I think as a practical matter, when all is said
and done, and I guess that is my biggest point, we can't allow
it to affect our bottom line. We will have to make up for those
fees in some other way, but it costs hundreds of thousands of
dollars to offer free checking, free Internet banking, free
debit cards, free services to so many of the folks out there
who are balancing their checkbooks accurately and taking care
of things and not incurring any fees whatsoever. And one of the
ways we do that, frankly, is from the fees that we collect on
some of these other products. And so what will happen is there
will simply be a transfer of those fees. Either the lenders--
the borrowers will have to pay for it, other deposit services
will end up making it up. In the end, somebody is going to have
to pay the price because we have to continue to have a profit
that makes it worthwhile for investors to want to buy our
stock.
Chairman Bachus. All right. Thank you.
I appreciate the testimony, and I do think one thing that
we highlighted here is that private equity companies and hedge
funds as well as community banks can be part of the solution
and that none of them I think were part of the problem. They
didn't create a problem, they created jobs and they have
sustained jobs, and we should be very careful in the level of
regulation.
Thank you very much for your testimony.
The Chair notes that some members may have additional
questions for this panel that they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
Also, we have an unanimous consent request to enter into
the record letters from the National Association of Federal
Credit Unions and the Manufactured Housing Association for
Regulatory Reform. Without objection, that is so ordered, and
this hearing is adjourned, thank you.
[Whereupon, at 2:00 p.m., the hearing was adjourned.]
A P P E N D I X
January 26, 2011
[GRAPHIC] [TIFF OMITTED] 64550.001
[GRAPHIC] [TIFF OMITTED] 64550.002
[GRAPHIC] [TIFF OMITTED] 64550.003
[GRAPHIC] [TIFF OMITTED] 64550.004
[GRAPHIC] [TIFF OMITTED] 64550.005
[GRAPHIC] [TIFF OMITTED] 64550.006
[GRAPHIC] [TIFF OMITTED] 64550.007
[GRAPHIC] [TIFF OMITTED] 64550.008
[GRAPHIC] [TIFF OMITTED] 64550.009
[GRAPHIC] [TIFF OMITTED] 64550.010
[GRAPHIC] [TIFF OMITTED] 64550.011
[GRAPHIC] [TIFF OMITTED] 64550.012
[GRAPHIC] [TIFF OMITTED] 64550.013
[GRAPHIC] [TIFF OMITTED] 64550.014
[GRAPHIC] [TIFF OMITTED] 64550.015
[GRAPHIC] [TIFF OMITTED] 64550.016
[GRAPHIC] [TIFF OMITTED] 64550.017
[GRAPHIC] [TIFF OMITTED] 64550.018
[GRAPHIC] [TIFF OMITTED] 64550.019
[GRAPHIC] [TIFF OMITTED] 64550.020
[GRAPHIC] [TIFF OMITTED] 64550.021
[GRAPHIC] [TIFF OMITTED] 64550.022
[GRAPHIC] [TIFF OMITTED] 64550.023
[GRAPHIC] [TIFF OMITTED] 64550.024
[GRAPHIC] [TIFF OMITTED] 64550.025
[GRAPHIC] [TIFF OMITTED] 64550.026
[GRAPHIC] [TIFF OMITTED] 64550.027
[GRAPHIC] [TIFF OMITTED] 64550.028
[GRAPHIC] [TIFF OMITTED] 64550.029
[GRAPHIC] [TIFF OMITTED] 64550.030
[GRAPHIC] [TIFF OMITTED] 64550.031
[GRAPHIC] [TIFF OMITTED] 64550.032
[GRAPHIC] [TIFF OMITTED] 64550.033
[GRAPHIC] [TIFF OMITTED] 64550.034
[GRAPHIC] [TIFF OMITTED] 64550.035
[GRAPHIC] [TIFF OMITTED] 64550.036
[GRAPHIC] [TIFF OMITTED] 64550.037
[GRAPHIC] [TIFF OMITTED] 64550.038
[GRAPHIC] [TIFF OMITTED] 64550.039
[GRAPHIC] [TIFF OMITTED] 64550.040
[GRAPHIC] [TIFF OMITTED] 64550.041
[GRAPHIC] [TIFF OMITTED] 64550.042
[GRAPHIC] [TIFF OMITTED] 64550.043
[GRAPHIC] [TIFF OMITTED] 64550.044
[GRAPHIC] [TIFF OMITTED] 64550.045
[GRAPHIC] [TIFF OMITTED] 64550.046
[GRAPHIC] [TIFF OMITTED] 64550.047
[GRAPHIC] [TIFF OMITTED] 64550.048
[GRAPHIC] [TIFF OMITTED] 64550.049
[GRAPHIC] [TIFF OMITTED] 64550.050
[GRAPHIC] [TIFF OMITTED] 64550.051
[GRAPHIC] [TIFF OMITTED] 64550.052
[GRAPHIC] [TIFF OMITTED] 64550.053
[GRAPHIC] [TIFF OMITTED] 64550.054
[GRAPHIC] [TIFF OMITTED] 64550.055
[GRAPHIC] [TIFF OMITTED] 64550.056
[GRAPHIC] [TIFF OMITTED] 64550.057
[GRAPHIC] [TIFF OMITTED] 64550.058
[GRAPHIC] [TIFF OMITTED] 64550.059
[GRAPHIC] [TIFF OMITTED] 64550.060
[GRAPHIC] [TIFF OMITTED] 64550.061
[GRAPHIC] [TIFF OMITTED] 64550.062
[GRAPHIC] [TIFF OMITTED] 64550.063
[GRAPHIC] [TIFF OMITTED] 64550.064
[GRAPHIC] [TIFF OMITTED] 64550.065
[GRAPHIC] [TIFF OMITTED] 64550.066
[GRAPHIC] [TIFF OMITTED] 64550.067
[GRAPHIC] [TIFF OMITTED] 64550.068
[GRAPHIC] [TIFF OMITTED] 64550.069
[GRAPHIC] [TIFF OMITTED] 64550.070
[GRAPHIC] [TIFF OMITTED] 64550.071
[GRAPHIC] [TIFF OMITTED] 64550.072
[GRAPHIC] [TIFF OMITTED] 64550.073
[GRAPHIC] [TIFF OMITTED] 64550.074
[GRAPHIC] [TIFF OMITTED] 64550.075
[GRAPHIC] [TIFF OMITTED] 64550.076
[GRAPHIC] [TIFF OMITTED] 64550.077
[GRAPHIC] [TIFF OMITTED] 64550.078
[GRAPHIC] [TIFF OMITTED] 64550.079
[GRAPHIC] [TIFF OMITTED] 64550.080
[GRAPHIC] [TIFF OMITTED] 64550.081
[GRAPHIC] [TIFF OMITTED] 64550.082
[GRAPHIC] [TIFF OMITTED] 64550.083
[GRAPHIC] [TIFF OMITTED] 64550.084
[GRAPHIC] [TIFF OMITTED] 64550.085
[GRAPHIC] [TIFF OMITTED] 64550.086
[GRAPHIC] [TIFF OMITTED] 64550.087
[GRAPHIC] [TIFF OMITTED] 64550.088
[GRAPHIC] [TIFF OMITTED] 64550.089