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A FURTHER EXAMINATION OF FEDERAL RESERVE REFORM PROPOSALS HEARING BEFORE THE SUBCOMMITTEE ON MONETARY POLICY AND TRADE OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED FIFTEENTH CONGRESS SECOND SESSION JANUARY 10, 2018 Printed for the use of the Committee on Financial Services Serial No. 115–69 ( U.S. GOVERNMENT PUBLISHING OFFICE WASHINGTON nshattuck on FSR297 with DISTILLER 31–325 PDF VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 : 2018 Sfmt 5011 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT HOUSE COMMITTEE ON FINANCIAL SERVICES JEB HENSARLING, Texas, Chairman PATRICK T. MCHENRY, North Carolina, Vice Chairman PETER T. KING, New York EDWARD R. ROYCE, California FRANK D. LUCAS, Oklahoma STEVAN PEARCE, New Mexico BILL POSEY, Florida BLAINE LUETKEMEYER, Missouri BILL HUIZENGA, Michigan SEAN P. DUFFY, Wisconsin STEVE STIVERS, Ohio RANDY HULTGREN, Illinois DENNIS A. ROSS, Florida ROBERT PITTENGER, North Carolina ANN WAGNER, Missouri ANDY BARR, Kentucky KEITH J. ROTHFUS, Pennsylvania LUKE MESSER, Indiana SCOTT TIPTON, Colorado ROGER WILLIAMS, Texas BRUCE POLIQUIN, Maine MIA LOVE, Utah FRENCH HILL, Arkansas TOM EMMER, Minnesota LEE M. ZELDIN, New York DAVID A. TROTT, Michigan BARRY LOUDERMILK, Georgia ALEXANDER X. MOONEY, West Virginia THOMAS MACARTHUR, New Jersey WARREN DAVIDSON, Ohio TED BUDD, North Carolina DAVID KUSTOFF, Tennessee CLAUDIA TENNEY, New York TREY HOLLINGSWORTH, Indiana MAXINE WATERS, California, Ranking Member CAROLYN B. MALONEY, New York NYDIA M. VELÁZQUEZ, New York BRAD SHERMAN, California GREGORY W. MEEKS, New York MICHAEL E. CAPUANO, Massachusetts WM. LACY CLAY, Missouri STEPHEN F. LYNCH, Massachusetts DAVID SCOTT, Georgia AL GREEN, Texas EMANUEL CLEAVER, Missouri GWEN MOORE, Wisconsin KEITH ELLISON, Minnesota ED PERLMUTTER, Colorado JAMES A. HIMES, Connecticut BILL FOSTER, Illinois DANIEL T. KILDEE, Michigan JOHN K. DELANEY, Maryland KYRSTEN SINEMA, Arizona JOYCE BEATTY, Ohio DENNY HECK, Washington JUAN VARGAS, California JOSH GOTTHEIMER, New Jersey VICENTE GONZALEZ, Texas CHARLIE CRIST, Florida RUBEN KIHUEN, Nevada SHANNON MCGAHN, Staff Director nshattuck on FSR297 with DISTILLER (II) VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT SUBCOMMITTEE ON MONETARY POLICY AND TRADE ANDY BARR, Kentucky, Chairman ROGER WILLIAMS, Texas, Vice Chairman FRANK D. LUCAS, Oklahoma BILL HUIZENGA, Michigan ROBERT PITTENGER, North Carolina MIA LOVE, Utah FRENCH HILL, Arkansas TOM EMMER, Minnesota ALEXANDER X. MOONEY, West Virginia WARREN DAVIDSON, Ohio CLAUDIA TENNEY, New York TREY HOLLINGSWORTH, Indiana GWEN MOORE, Wisconsin, Ranking Member GREGORY W. MEEKS, New York BILL FOSTER, Illinois BRAD SHERMAN, California AL GREEN, Texas DENNY HECK, Washington DANIEL T. KILDEE, Michigan JUAN VARGAS, California CHARLIE CRIST, Florida nshattuck on FSR297 with DISTILLER (III) VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT nshattuck on FSR297 with DISTILLER VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT CONTENTS Page Hearing held on: January 10, 2018 .............................................................................................. Appendix: January 10, 2018 .............................................................................................. 1 35 WITNESSES WEDNESDAY, JANUARY 10, 2018 Baker, Dean, Co-Director and Senior Economist, Center for Economic and Policy Research .................................................................................................... Michel, Norbert J., Director, Center for Data Analysis, The Heritage Foundation ........................................................................................................................ Pollock, Alex J., Distinguished Senior Fellow, R Street Institute ....................... Selgin, George, Senior Fellow and Director, Center for Monetary and Financial Alternatives, The Cato Institute .................................................................. 8 5 7 10 APPENDIX Prepared statements: Baker, Dean ...................................................................................................... Michel, Norbert J. ............................................................................................. Pollock, Alex J. ................................................................................................. Selgin, George ................................................................................................... ADDITIONAL MATERIAL SUBMITTED FOR THE 36 43 51 56 RECORD Moore, Hon. Gwen: Written statement of Americans for Financial Reform ................................. Written statement from Josh Bivens, the Economic Policy Institute .......... Written statement from Jared Bernstein, the Center on Budget and Policy Priorities .................................................................................................. Written statement of the Conference of State Bank Supervisors ................ Written statement of the Center for Popular Democracy’s Fed Up coalition ................................................................................................................. 64 65 70 72 74 nshattuck on FSR297 with DISTILLER (V) VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00005 Fmt 5904 Sfmt 5904 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT nshattuck on FSR297 with DISTILLER VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00006 Fmt 5904 Sfmt 5904 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT A FURTHER EXAMINATION OF FEDERAL RESERVE REFORM PROPOSALS Wednesday, January 10, 2018 U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MONETARY POLICY AND TRADE, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The subcommittee met, pursuant to notice, at 2:03 p.m., in room 2128, Rayburn House Office Building, Hon. Andy Barr [chairman of the subcommittee] presiding. Present: Representatives Barr, Williams, Lucas, Huizenga, Pittenger, Hill, Emmer, Mooney, Davidson, Tenney, Hollingsworth, Hensarling, Moore, Foster, Sherman, Green, Kildee, and Vargas. Chairman BARR. The committee will come to order. Without objection, the Chair is authorized to declare a recess of the committee at any time, and all Members will have 5 legislative days within which to submit extraneous materials to the Chair for inclusion in the record. We have had some unscheduled votes come up throughout the day. We may have that again. So I apologize in advance if this is a bit of a start-and-stop hearing because of that. We will try to avoid that if we can. This hearing is entitled ‘‘A Further Examination of Federal Reserve Reform Proposals.’’ I now recognize myself for 5 minutes to give an opening statement. Today we are turning the corner on monetary policy. We will soon have a Federal Reserve Board Chairman and additional confirmations to the Board of Governors. We are excited about what personnel change can bring in terms of a more reliable monetary policy for American economic opportunities, and we remain interested in bipartisan reforms that can improve the deliberative processes and policy transparency. During today’s hearing, we will consider important legislative proposals to improve the rules of the game for both our monetary policymakers and Congressional overseers. These reforms provide for a monetary policy that is better informed about economic conditions throughout the country while focusing our Federal Reserve on what it can do and only what it can do. Monetary policy can appear complicated, but unless we fortify its ability to signal when and where goods and services can further productive opportunities, we cannot fulfill our economic potential. nshattuck on FSR297 with DISTILLER (1) VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 2 nshattuck on FSR297 with DISTILLER Two years ago, the House of Representatives passed our Fed Oversight Reform and Modernization Act. As we meet today, we have a chance to move this and related legislation even further. Some detractors persist with the mantra that except for the Fed’s great monetary distortion our economy would have fallen into another Great Depression. According to them, we should be thanking the Fed, not reforming it. It is true that our economy is performing better than many, but ‘‘better than many’’ is the wrong metric for America and Americans. The right measure is whether we are performing as strongly as we can. The fact that our recent recovery was considerably weaker than previous post-war rebounds says that we can and must do better to live up to our potential. The good news is that we are off to a strong start. The past 2 quarters of 3-percent growth are promising, and the New York Fed’s latest ‘‘Nowcasting Report’’ predicts an even stronger 4-percent growth rate for the last quarter of 2017. Our efforts going forward will be more effective if we understand how we got here. And we got here in considerable part by asking more from our monetary policy than it could possibly deliver. Some of us remember the Rock and Roll Hall of Fame band Jefferson Starship. One of their hit songs includes the phrase, ‘‘If only you believe in miracles, we’d get by.’’ A catchy tune for sure, but monetary policies should not depend on miracles. Year after year, the American people were told that the promise of unconventional policies would appear soon. Almost a decade out of the financial crisis, we must stop waiting and start doing. Legislation under consideration today builds on the foundation of local knowledge and individual incentives—fundamentals that are absent from too many of our policy discussions. Some economists insist that our best days are behind us. They tell us that the most unconventional policy responses to the Great Recession had nothing to do with an economy that had to wait for the last election to start showing signs of life. By ignoring that macro performance depends on micro decisions. Top-down models assume a supernatural capacity to optimally control the most complex of systems, our economy. But just as businesses cannot continually hide mismanagement behind financial engineering, governments cannot support true prosperity by opportunistically diverting scarce resources into politically favored national income accounts. Almost a decade out from the Great Recession, returning to a more reliable monetary policy is long overdue. It is time to abandon the improvisation at the Federal Reserve. Monetary policy distortions helped us get into the recession. More of the same will not bring a stronger recovery. Monetary policy needs to return to doing what it can and only what it can, and that is consistently producing an efficient exchange medium so that real goods and services, which include labor, can freely engage in their most promising opportunities. Legislation that we will consider today does just that. And, with that, I now recognize the gentleman from California, Mr. Sherman, for 2 minutes for an opening statement. Mr. SHERMAN. Thank you. Mr. Chairman, you have made me feel very old. I have always known them as Jefferson Airplane. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 3 nshattuck on FSR297 with DISTILLER Chairman BARR. Yes. Mr. SHERMAN. The legitimacy of our Federal Government and all of our governments is based on the theory of democracy. But the enemies of democracy take refuge in the belief that, while we elect some people, we don’t actually let them make the important decisions and that the elitists will control the entities that make the important decisions. The most important decisions discussed in this room are those made by the Fed, where the elected representatives of the people get to kibitz but the people actually making decisions are well removed from the concept of democracy. But many of them are, in fact, appointees of the President, but others are selected by the theory of one bank, one vote. Now, we now have A, B, and C levels, but that B level is selected by the banks, meaning that critically important Governmental decisions are made where the banks have votes and the people don’t. This is exacerbated by the fact that not only do we have this one bank, one vote, but California gets as much clout as areas that have less than half of its population. So democracy is thwarted in two ways. We ought to move forward to the idea that Government decisions in America should be made by those selected by elected leaders. In addition, the Fed made as much as $100 billion in a year profit by mistake. If we have the people of America told that they are allowed to look at what the Fed does, and not just on the Bloomberg channel, we would be insisting that any policy that produces $100 billion for the Federal Government be looked at as a policy that might generate $100 billion profit for the Federal Government and that that cannot be ignored just because the elitists say they did it by mistake, therefore it doesn’t count. I look forward to a true democracy in this country. I am old, but I hope I am young enough to see it. I yield back. Chairman BARR. The gentlemen’s time has expired. The Chair now recognizes the distinguished Ranking Member for an opening statement for 3 minutes. Ms. MOORE. And thank you so much, Mr. Chairman and committee. And thank you to our witnesses gathered here. Today, we are going to be examining several pieces of legislation that are identical or substantively the same as we have considered before, and legislation that I am opposed to. Collectively, this legislation represents the proverbial solution in search of a problem. Of course, these solutions aren’t the problem, in many of cases. Let us take legislation that would allow bankers even more power to appoint the president of the Federal Reserve banks. Now, this would unwind an important Dodd-Frank reform to diversify the concerns and opinions the Fed considers. This reform is a slap in the face to Americans. And it is so counterintuitive to the majority, to the Republican talking points about being tough on Wall Street, and then turning around and betraying our constituents by selling them out to Wall Street banks. Deutsche Bank just got done being mired in lots of scandals, including rigging LIBOR and helping Russians launder money and get around U.S. sanctions. Deutsche Bank also makes questionable VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 4 nshattuck on FSR297 with DISTILLER loans to our President, and this committee refuses to even look into those loans for Deutsche Bank. In other news, our President waives part of the punishment imposed on the Deutsche Bank, even as he owes it hundreds of millions of dollars in loans that have raised a lot of eyebrows. These bills make little sense in the best of times, like appropriating money for the Fed. The GOP has weaponized funding regulators at the request of the regulated entities. Ask the SEC (U.S. Securities and Exchange Commission), ask the CFTC, and, of course, you could also ask the EPA. Given the ongoing scandal of global money laundering and illicit financing and pay-for-play in this Administration, I simply don’t want to open the door for another avenue for these obstructions of sound financial regulation by appropriating the Fed. I have letters to enter into the record, Mr. Chairman, without objection. I have Americans for Financial Reform, a statement; and a statement from Dr. Josh Bivens, Research Director of the Economic Policy Institute; and a statement from Dr. Jared Bernstein, economist at the Center on Budget and Policy Priorities. Chairman BARR. Without objection. Ms. MOORE. Thank you. And I yield back. Chairman BARR. The gentlelady yields back. Today, we welcome the testimony of four distinguished witnesses. First, Dr. Norbert Michel, who is the Director of the Center for Data Analysis at The Heritage Foundation, where he studies and writes about financial markets and monetary policy. Before rejoining Heritage in 2013, Michel was a tenured professor at Nicholls State University’s College of Business, teaching finance, economics, and statistics. Dr. Michel holds a doctoral degree in financial economics from the University of New Orleans. He received his bachelor of business administration in finance and economics from Loyola University. Mr. Alex Pollock is a distinguished Senior Fellow with the R Street Institute, providing thought and policy leadership on financial systems, cycles of booms and busts, financial crises, risk and uncertainty, central banking, and the politics of finance. Alex joined R Street in January 2016 from the American Enterprise Institute, where he was a resident fellow from 2004 to 2015. He previously was President and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004. He received his bachelor’s from Williams College, has a master’s in philosophy from the University of Chicago, and a master of public administration degree in international affairs from Princeton University. Dr. Dean Baker is the Co-founder and Co-director and Senior Economist at the Center for Economic and Policy Research. His areas of research include housing and macroeconomics, intellectual property, Social Security, Medicare, and European labor markets. Dean previously worked as a senior economist at the Economic Policy Institute and as an assistant professor at Bucknell University. He has also worked as a consultant for the World Bank, the Joint Economic Committee of the U.S. Congress, and the OECD’s Trade Union Advisory Council. He received his B.A. from Swarthmore VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 5 College and his Ph.D. in economics from the University of Michigan. Last but not least, Dr. George Selgin is a Senior Fellow and Director of the Center for Monetary and Financial Alternatives at the Cato Institute and Professor Emeritus of economics at the University of Georgia. His research covers a broad range of topics within the field of monetary economics. Selgin retired from the University of Georgia to join Cato in September 2014. He has also taught at George Mason University, the University of Hong Kong, and West Virginia University. He holds a B.A. in economics and zoology from Drew University and a Ph.D. in economics from New York University. Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. Without objection, each of your written statements will be made part of the record. And, Dr. Norbert Michel, you are now recognized for 5 minutes. STATEMENT OF NORBERT J. MICHEL nshattuck on FSR297 with DISTILLER Dr. MICHEL. Thank you. Chairman Barr, Ranking Member Moore, Members of the committee, thank you for the opportunity to testify today. Though I am the Director for the Center for Data Analysis at The Heritage Foundation, the views that I express in this testimony are mine. They should be not construed as representing any official position of The Heritage Foundation. Congress could enact many reforms that would improve the transparency of the Federal Reserve’s operations as well as the Fed’s accountability. What should be obvious but what is often ignored is that the Federal Reserve is, in fact, a creature of Congress. Any operational independence that the Fed enjoys should definitely apply to the Fed’s independence from the Executive Branch. The Federal Reserve, however, should always remain accountable to the public through its elected representatives in Congress. One set of possible reforms deals with changing the Fed’s ability to pay interest on reserves, a power that Congress granted to the Fed ahead of its original schedule during the 2008 crisis. The record shows that Congress did not make this policy change to alter the Fed’s main tool for monetary control, but that is exactly what the Fed ended up doing once it had this authority, ultimately using it to supplant, rather than supplement, its traditional open market operations. Though certainly not Congress’ intent, allowing the Fed to pay interest on excess reserves has enhanced the Fed’s ability to allocate credit to specific entities rather than to provide systemwide liquidity. Congress now has several options to hold the Fed more accountable and fix this problem: One, allow the Federal Open Market Committee, rather than the Board of Governors, to set the rate paid on reserve balances; two, clarify the statutory meaning of ‘‘general level of short-term interest rates’’ so that the Fed cannot pay above-market rates; and, three, remove the Fed’s authority to pay interest on excess reserves entirely, which would be my preferred of the three. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 6 nshattuck on FSR297 with DISTILLER Another set of reforms deals with restoring the original decentralized model that Congress used to create the Federal Reserve System. The present-day Fed looks and acts quite differently than the system that Congress originally created, and one of the glaring differences is the increased centralization of the Fed’s power inside Washington, D.C. In 1935, Congress replaced the original Federal Reserve Board with the seven-member Board of Governors that exists today, and it also created the Federal Open Market Committee. From its creation, all seven members of the board, the New York Fed president, and four rotating district bank presidents have had voting seats on the FOMC (Federal Open Market Committee), thus ensuring that the Fed’s power would remain centralized in Washington, D.C. Congress can implement several policies in this area to rectify that mistake, thus restoring the more decentralized approach. For instance, Congress could change the makeup of the committee so that one representative from each district bank has a voting seat or, instead, increase the number of voting seats that district banks have on the committee to either six or seven to lessen the advantage. Either way, Congress should ensure that the New York Fed is no longer the only district bank with a permanent voting seat on the committee. Finally, because Congress has delegated so much authority to the Fed, there are several other smaller policy changes that Congress should make to ensure more transparency and better accountability. One straightforward improvement would be to subject the Fed’s nonmonetary policy functions to the regular congressional appropriations process, thus giving Congress a powerful tool to hold the Fed accountable. Another direct fix, to amend the Federal Reserve Act to define the blackout period surrounding the committee meeting and to specify exactly which types of communications apply. The existing type of vague and unclear requirements always hinder transparency. Two additional improvements that I would identify would be requiring Congressional testimony from an alternate Fed official when the Vice Chair of Supervision is vacant and, second, holding all Federal Reserve staff to the same disclosure and ethics standards as those of the SEC. Ultimately, Congress could improve accountability and transparency of the central bank by narrowing the Fed’s scope of responsibilities so that it is no longer a regulator at all, thus focusing the central bank on monetary policy, which is what it was supposed to do originally. This change would fit naturally with giving all Fed district banks a voting seat on the FOMC, ending in better representation for all areas of the country. Thank you, and I look forward to any questions you may have. [The prepared statement of Dr. Michel can be found on page 43 of the Appendix] Chairman BARR. Thank you. Mr. Pollock, you are recognized for 5 minutes. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 7 STATEMENT OF ALEX J. POLLOCK nshattuck on FSR297 with DISTILLER Mr. POLLOCK. Thank you, Mr. Chairman, Ranking Member Moore, and Members of the subcommittee. The proposals under consideration today are all parts of a timely and fundamental review of America’s central bank. From James Madison, who wanted to protect the new United States from a ‘‘rage for paper money,’’ as he said, to now, money has always been and is an inherently political issue, involving questions not amenable to technocratic solutions but requiring judgments about the general welfare. For example, Congress instructed the Federal Reserve in statute to pursue, quote, ‘‘stable prices,’’ unquote. But the Federal Reserve decided on its own that the term ‘‘stable prices’’ means perpetual inflation at the rate of 2 percent a year. This reasonably could be viewed as a contradiction in terms but certainly raises the question, who should have the power to make such judgments, the Fed by itself or the Congress, having heard from the Fed and others? Under the Fed’s current fiat money regime, we have experienced the great inflation of the 1970’s, the financial crises of the 1980’s, the bubbles and crises of the 1990’s and 2000’s, and the radical asset price inflation of the 2010’s, the outcome of which is as yet unknown. Since the economic and financial future is unknowable, the Fed is incapable of knowing what the results of its own actions will be. How should the Fed be accountable for its various judgments, guesses, and gambles, and to whom? And, at the same time, how should it be accountable for how it spends the taxpayers’ money and how it makes decisions? I believe there are four general categories for this discussion: One, the accountability of the Federal Reserve; two, the checks and balances appropriate to the Fed; three, the centralized versus Federal elements in the Fed’s own structure; and, four, dealing with uncertainty. On accountability, the power to define and manage money is granted by the Constitution to Congress. There can be no doubt that the Federal Reserve is a creature of and accountable to the Congress, just as Norbert said. And the Congress, of course, represents the people, for whom the nature and potential abuse of their money is always a fundamental issue. The primary central bank independence problem, in my view, is independence from the executive. The executive naturally wants its programs and especially its wars financed by the central bank as needed, and a lot of history demonstrates this. And some of it is in my written testimony. I think it is important to realize that the Federal Reserve Reform Act of 1977 and the Humphrey-Hawkins Act of 1978 were attempts under Democratic Party leadership to make the Fed more accountable to Congress, just as we are talking about today. This was the right idea, but I think it is fair to say these attempts were not successful. The most fundamental power of the legislature is the power of the purse, and Congress can use this essential power for Fed accountability. Every dollar of Fed expense is taxpayer money and would go to the Treasury’s general fund if not spent by the Fed on VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 8 itself. Since it is taxpayer money, the proposal to subject the Fed to appropriations, in my view, makes sense. Checks and balances are essential to our constitutional Government and to every part of it, including the Federal Reserve. Since the Fed has amassed huge regulatory power, the Congress should require additional reporting regarding the Fed’s regulatory plans and rules, especially in its new role as the dominant regulator of systemic risk. The original Federal Reserve Act of 1913 tried to balance regional and central power, hence the name Federal Reserve System, not Bank of the United States. This theory lost out in 1935, but, in my view, adjustment back to a more dispersed power within the Fed would make sense. And three of the draft bills under consideration move in this direction and are, in my opinion, all appropriate reforms, as are anything which increases the intellectual diversification of Federal Reserve operations. And a number of the bills do that. In sum, the Federal Reserve needs to be accountable to the Congress, to be subject to appropriate checks and balances, be understood in the context of inherent financial and economic uncertainty, and would benefit from rebalancing of centralized versus Federal elements in its internal structures. Thank you for the opportunity to share these views. [The prepared statement of Mr. Pollock can be found on page 51 of the Appendix] Chairman BARR. Thank you, Mr. Pollock. Dr. Baker, you are recognized for 5 minutes. STATEMENT OF DEAN BAKER nshattuck on FSR297 with DISTILLER Dr. BAKER. Thank you, Chairman Barr and Ranking Member Moore. I appreciate the opportunity to address you and the Members of the subcommittee. I will address the seven proposals that you asked us to speak about, but first I would like to give at least my assessment of how we should think about the Federal Reserve. And basically what I would say is that we have, to some extent, an anachronism. The Federal Reserve Act, of course, created over a century ago, and, at that time, it was created as a mixed public-private entity. And, in that way, the Federal Reserve Bank is really an outlier among other central banks, pretty much all of which—I am saying ‘‘pretty much all’’ because there is maybe one I don’t know of—but pretty much all of which are fully public entities. So if you look at the European Central Bank, the Bank of England, the Bank of Canada, these are all fully public entities. So the idea that we have a mixed public-private entity is really an anachronism that I think is historically the wrong direction and certainly puts us out of line with the rest of the world. And it creates this perverse situation that Representative Sherman referred to in his opening comments where we have banks that have a say on monetary policy and, perhaps even more perversely, have a role in naming their own regulators. While we would, of course, welcome the input of the financial sector, the banking industry in monetary policy, as we would other sectors, VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 9 nshattuck on FSR297 with DISTILLER the idea that they have particular insight that we need in the structure of monetary policy I find hard to understand. Furthermore, in terms of having them select their own regulators, we all recognize that the affected industry—the pharmaceutical industry is going to lobby the Food and Drug Administration to promote its interests, or the telecommunications industry will lobby the Federal Communications Commission. We don’t let them pick commissioners. And that is, in effect, what we have in the current structure of the Fed. So, from that vantage point, my view is we should be moving toward a more strictly public Fed. And I put these categories and proposals into two categories: One, shifting power back toward the banks, away from the appointed Governors; and, two, questions of governance, more narrow questions of governance that—well, I will come to those—I think, in some ways, can be seen as perhaps harassing the Federal Reserve Board. On the first question of putting more power in the hands of the banks, well, allowing Class A directors to vote for bank presidents is very directly giving more power to the banks over selecting the regional bank presidents. That was a very conscious decision in the Dodd-Frank bill, to move in the opposite direction, to try and take away power from the banks in that selection, although, as Representative Sherman pointed out, they still select the Class B directors, which means they have half the votes when you have a bank president being considered. The second issue, have all the bank presidents vote on the FOMC, again, this is a question of giving more power to unelected officials, giving power—or I shouldn’t say ‘‘unelected officials’’—people who are not appointed through the democratic process. It is giving power to people who are selected by the banks. I cannot see why you would want to go in that direction. The third in that vein is to have the FOMC determine the interest rates on reserves. This is a little perplexing to me because, in my view, the key question here is the policy instrument, what policy being decided, which, of course, is in general the interest rate on overnight money, the Federal funds rate, and the interest rate on reserves is a way to target that. So I am a little bit at a loss, what the committee or Congress should be looking to do by having the whole FOMC vote on interest rates on reserves. It just seems to me a rather peculiar policy. I should also point out, there seems to be some idea here that the Fed has failed. And, obviously, one could argue whether it has failed or succeeded. But if we look at which direction it has gone, it has failed to hit its inflation target. We have consistently been below the 2-percent target. And I realize some people may not like 2 percent as an inflation target, but the Fed, of course, has been very public about that. And Congress could tell them they should have another target if Congress felt otherwise. So they have been very open on that being their target. They have been under that target consistently ever since the Great Recession. And we did an analysis looking at votes of bank presidents—dissents, I should say, of bank presidents in the last 25 years, the whole period for which reasons were given. And of 72 dissents, 64 were for more restrictive monetary policy, meaning they would VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 10 have given us still lower inflation. So, in other words, they would not have been right. If we gave them more votes, we would be more wrong than we are today. Very quickly, dealing with the other issues, I will just mention the appropriations issue. I do think Congress does have control over the purse. On the other hand, I would hate to see it decided on a year-to-year basis. What I thought—I mention it in my testimony—there is a formula for appropriating money or allocating money to the Consumer Financial Protection Bureau. I would recommend something comparable to the Fed, that whether it be—you could target to GDP. I mean, one could pick other targets, say, onetenth of 1 percent GDP, that might be allocated to the Fed. And that way, you could say, this is how much money you have, and Congress will have exercised its function here. Thank you. [The prepared statement of Dr. Baker can be found on page 36 of the Appendix] Chairman BARR. Thank you, Dr. Baker. Dr. Selgin, you are recognized for 5 minutes. STATEMENT OF GEORGE SELGIN nshattuck on FSR297 with DISTILLER Dr. SELGIN. Thank you, Chairman Barr, Ranking Member Moore, and distinguished committee Members. I appreciate the opportunity to testify today on the topic of reforming the Fed. My remarks will concern exclusively the proposal to make the FOMC officially responsible for setting the interest rate paid on banks’ excess reserves. From the mid-1930’s until recently, legal responsibility for monetary policy has rested with the FOMC, the Federal Open Market Committee, which, as has been mentioned, is made up of the seven members of the Federal Reserve Board of Governors, plus five regional Federal Reserve bank presidents. During the last crisis, however, that longstanding role came to an abrupt, if little noticed, end. The proximate cause of this change was the 2008 Emergency Economic Stabilization Act. That act allowed the Fed to immediately begin paying interest on banks’ reserve balances, as the 2006 Financial Services Regulatory Relief Act would have allowed them to do, though not starting until 3 years later. As the name of the 2006 act suggests, its purpose was to relieve banks from burdensome reserve requirements by modestly compensating them for holding required reserves. Interest on reserves was not supposed to be a means for regulating monetary policy. For these reasons, the interest rate on reserves was, by law, not supposed to, quote, ‘‘exceed the general level of short-term interest rates.’’ Consistent with the 2006 act’s limited aims, it allowed the Board of Governors, rather than the FOMC, to set interest rates on banks’ reserve balances. Now, the Emergency Economic Stabilization Act left these provisions unchanged. But in October 2008, when that act went into effect, the Fed had entirely different reasons for wishing to pay interest on banks’ reserve balances. Primarily, it wanted not merely to compensate banks for holding required reserves but to entice them VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 11 nshattuck on FSR297 with DISTILLER to accumulate excess reserves that were coming their way as a result of the Fed’s emergency lending. Thus, the payment of interest on excess reserves, particularly, was transformed into a monetary policy tool. Open market operations, the FOMC’s traditional means of regulating monetary policy, in turn became useless, as banks found holding reserves more lucrative than lending them. Now, the Fed relies almost exclusively on changes in the interest rate it pays on excess reserve balances to adjust its policy stance, where that interest rate is determined not by the FOMC but by the Federal Reserve Board. So, while the FOMC is supposed to be in charge of monetary policy by law, the Federal Reserve Board is really in charge. The regional bank presidents have, in consequence, been deprived of one of the more important roles assigned to them when the Fed was founded and continued by subsequent revisions of the Federal Reserve Act. I believe that Congress has a clear duty to put responsibility for the monetary policy decisionmaking back where it is supposed to have been all along. It can do this in either of two ways: First, Congress might revise the 2006 statute so that it allows the FOMC, rather than the Federal Reserve Board, to set interest rates on bank reserve balances, which is the proposal that has been made. Alternatively, though, Congress might prevent the Fed from continuing to use interest on reserves as a monetary policy tool. It can do that also in two ways: It could restrict interest payments to required reserve balances. Alternatively, it could strictly enforce the provision in the 2006 act saying that interest rates should not ‘‘exceed the general level of short-term interest rates’’ by specifically defining that phrase to mean that the rate of interest on reserves should not exceed the Federal Reserve Bank of New York’s benchmark Broad Treasury Financing Rate, which is a perfectly useful indicator of general short-term rates. For reasons I spelled out in detail in my July 2017 testimony to this committee, I favored the latter set of alternatives. Thank you very much. [The prepared statement of Dr. Selgin can be found on page 56 of the Appendix] Chairman BARR. I thank all of you for your testimony. And we will begin, and I will recognize myself for 5 minutes of questioning. Let me start with you, Mr. Pollock. You have heard the opening statement of my good friend, the Ranking Member. You have heard criticisms from others challenging this legislative proposal that would subject the regulatory and supervisory functions of the Fed to the Congressional appropriations process. Could you respond or would you be willing to respond to the critique that subjecting the Fed to the appropriations process would politicize the Federal Reserve System or compromise, quote, ‘‘Fed independence’’? Mr. POLLOCK. Mr. Chairman, I would be very happy to do that. Let me repeat to begin with that the Federal Reserve is a creature of Congress and should be a creature of Congress and accountable to the Congress, and the power of the purse is the fundamental power of Congress. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 12 nshattuck on FSR297 with DISTILLER In this way, I think the proposal takes us to exactly what the constitutional design is—that is to say, the Congress is responsible for the definition of money and the management of money, in which the Federal Reserve is its helper. And the notion that the Federal Reserve or any Government body should be independent of the Congress is, in my opinion, a grave and very costly mistake. Chairman BARR. Thank you. And I would note that that legislative proposal does not tinker with the monetary policy functions of the Federal Reserve. It relates specifically to Congressional oversight of the regulatory functions and operations of the Federal Reserve. Could you comment also or elaborate on your testimony that dispersed power is important for a monetary policy authority and whether the legislation under consideration today can provide for a more fully informed monetary policy? Mr. POLLOCK. Mr. Chairman, I think the fundamental truth that has to be confronted, as I tried to suggest in my testimony, is that everything about monetary policy and the economic and financial future is subject to extreme uncertainty. It is not a matter which can be delegated successfully to experts. And it doesn’t matter how many hundreds of economists the Federal Reserve hires; they don’t get it any more right than anybody else does when it comes to knowing what should be done. Therefore, in my opinion, diversification of the Fed’s intellectual and informational deliberations is essential. That is the single best thing, in my view, you can do to combat the fundamental uncertainty. And having the Federal system with all banks involved—and I think all banks voting also makes sense—as well as empowering the other Governors, the non-Chairman Governors of the Federal Reserve, to carry out their own research and projects helps increase that intellectual diversification. You might still not get it right, but at least you will have a greater variety of thought and information to help in your efforts. Chairman BARR. Thank you very much. And, Dr. Michel, you heard what Dr. Baker’s concerns were with respect to restoring the authority of Class A directors to select district bank presidents. I think his argument is that you don’t want the banks themselves to be selecting their regulators. But my question to you is, are you aware of any actual conflicts of interests that may have motivated this section of Dodd-Frank, or was this silencing of district bank shareholders to further centralize—was the goal to further centralize the selection of district bank leaders in Washington? And what is the advantage of having a decentralized agency that is more compatible with American federalism? Dr. MICHEL. Sir, I think it was an effort to centralize more power here. I don’t recall—although I may have missed one—I don’t recall ever seeing such a case with a conflict of interest that was brought to light. And the advantages are many, in the sense that you have a large, diverse set of opinions. If anything, on the down side of decentralizing things, you might get smaller mistakes and not larger VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 13 nshattuck on FSR297 with DISTILLER mistakes, which would be a good thing. I think it is much more in the spirit of the federalism-type system that was put in place. Chairman BARR. And I would just add in my remaining time that shareholders of other corporations have proxy rights, and they have a right to have a say in the corporate governance. And I think that analogue would serve the Federal Reserve well, as well. With that, my time has expired, and I would recognize the Ranking Member for 5 minutes. Ms. MOORE. Thank you so much, Mr. Chairman. You know, I always really, really enjoy being a Member of Congress, because every meeting is a master class, with a distinguished panel like this. And I am particularly appreciative of the master class we got from you, Dr. Pollock, on the functions and priorities and privileges of Article I of the Constitution. We will call you back so that you can repeat to our colleagues and perhaps even people over there on the other side of Pennsylvania Avenue, if they decide ‘‘we are going to build a wall, no matter what,’’ that it is within the purview of Congress to decide those things. But for those of you who are not legislators by trade, just let me tell you what the appropriations process would be like. The appropriations process comes under an open rule. And we would have hundreds of amendments, even people sitting on this side of the dais, that side of the dais—I can see it now: No funds shall be used from this appropriation to collect data on the real estate market. And how do you then make decisions on the economy and set market with an amendment like that that may pass because somebody might want to hide what the real estate market is doing? You are going to see amendments like ‘‘no funds in this bill’’— or ‘‘funds in this bill shall be transferred from the New York Fed to the nonexistent L.A. Fed.’’ Sorry about that, Sherman. But you would see that amendment coming up. And so I am very, very concerned that, while it may be admirable—and I certainly agree that Article I needs to be more powerful—that this would wreak absolute chaos in this body. I can just see it now. I came up with all kinds of examples on this as I was listening to you, thinking about the hundreds of amendments that would come into line. And so I am offering to you a master class on what would happen if it were subject to the appropriations process. I guess I want to ask Dr. Baker to answer some questions. Some of these proposals do seem—or maybe for anybody on the panel— some of them do seem like they could be good adjustments. But I am very curious about the notion that political influence would not occur in the Fed with these recommendations, and particularly the one on the appropriations process. I understood, Dr. Baker, that you said maybe some sort of formula could be devised. But I am asking you, if you don’t think that I am—I am concerned about the tricks that could be applied in the appropriations process. As you know, we don’t pass appropriations bills on time, not since I have been here. Maybe that is going to happen someday. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 14 nshattuck on FSR297 with DISTILLER And so I am curious as to why the panel chooses—there are so many worthy proposals in here—why they choose this hill to die on. Dr. BAKER. Well, I will just briefly comment, since you originally directed it to me. I completely agree with your concerns there, which is why I was saying some sort of formula. Obviously, Congress could change that formula, but presumably it wouldn’t be done lightly. You did do that with the Consumer Financial Protection Bureau. I think you could do something comparable. And your point, in addition to what Congress might do, I should also point out, I don’t think the world breaks up easily into monetary policy and nonmonetary policy. So, when I first saw that, I was imagining a lot of things that the Fed would be doing, or at least I would be doing if I were at the Fed, which would be monetary policy, which a lot of people could say, no, that is getting into regulation. The world isn’t cut that way. Ms. MOORE. That is right. Dr. BAKER. So, if you want to appropriate for the Fed, obviously you have the authority to do that. But the idea that you are going to separate monetary and nonmonetary policy, I don’t see any way you could— Ms. MOORE. I don’t either. And we have some very stable geniuses here in the Congress. And so I am not sure that people on the—and we have wonderful appropriators—that they are capable of deciding how much we should or should not spend on collecting data or evaluating certain market forces. There will be an amendment saying that ‘‘no funds shall be used to enforce the dual mandate for unemployment.’’ And so, with that, I would gladly yield back to the Chairman. Chairman BARR. Thank you very much. The gentlelady yields back, and the Chair now recognizes the Vice Chairman of the subcommittee, Mr. Williams from Texas. Mr. WILLIAMS. Thank you, Mr. Chairman and Ranking Member Moore, and thank all of you for holding today’s hearing. While I am excited about incoming Federal Reserve Board Chairman Powell, I feel that the Fed is in desperate need of reform. The time for that reform is now, and I am glad that this afternoon we will examine a series of proposals seeking to increase the effectiveness and accountability that the Fed has been lacking. For too long, the Fed has just, frankly, run wild, taking actions as it sees fit and concentrating its power inside the Beltway, and it is time to make a change. The proposals before us offer many solutions to very important problems in the Federal Reserve System. Of note is my proposal, the FOMC Representation Improvement Act, which will allow the FOMC to make more informed monetary policy decisions by giving representation to all 12 district bank representatives. It is like many of the proposals before us today; it is straightforward and common sense. I am optimistic that we will make headway. And I look forward to the expert testimony of all of you today, and I thank all of you for being here. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 15 nshattuck on FSR297 with DISTILLER So my first question is to you, Dr. Michel. Thank you for being here and for your informative testimony on the best ways to, as you put it, lessen the centralization that has developed in the Federal Reserve system. Now, many of the proposals before us are in that spirit. My proposal, called, as I said earlier, the FOMC Representation Improvement Act, would give every district bank representative a vote in the FOMC. So do you feel that this policy will lessen the centralization in the Federal Reserve system? Dr. BAKER. Oh, absolutely. Yes. Mr. WILLIAMS. OK. Second, I would like to ask you also about the proposal to restore Class A director voting rights in the selection of district banks presidents. I agree with your testimony that section 1107 of Dodd-Frank, which took voting rights away from Class A directors, served only to increase the board’s political influence over district banks. And since the change was made, unconventional candidates, as we all know, have been chosen to succeed their conventional predecessors. So what is the danger in section 1107 of Dodd-Frank if Congress does not successfully restore voting rights to Class A directors in the district bank president selection process? And, second, will this proposal successfully restore the former balance? Dr. MICHEL. Sir, I do think 1107 actually was a solution in search of a problem. And, yes, I do think restoring it is the right way to go. I do think that some of the—without naming names, I think the goal should be to have people who understand their districts, understand banking in their districts, understand monetary policy in their districts, in those district bank roles. And I think this is probably the best way to go about restoring that, as opposed to getting some presidents that we got recently for more political reasons, which is inevitably what happens when somebody in Washington picks those people. Mr. WILLIAMS. We have seen it, haven’t we? Thank you. Mr. Pollock, in your testimony, you spent some time discussing the checks and balances necessary for our constitutional Government. No part of the Government should be exempt from oversight, the Fed included. Oftentimes, the Fed performs actions outside of its defined role of monetary policy, unaccountable to anyone. This needs to be changed. And by exercising the power of the purse and putting the nonmonetary policy functions of the Fed on appropriations, Congress can begin to rein in this out-of-control entity. So, in your estimation, is the proposal a step far enough in the right direction to begin to make the Fed more accountable to Congress? Mr. POLLOCK. Congressman, in my opinion, it is a definite step in the right direction, but more accountability would be desirable. And this committee has, in other contexts, discussed additional substantive accountability of the Federal Reserve with respect to its monetary and financial operations. I think that is a good idea. As I have pointed out in my testimony, in the 1970’s the Democratic Party worked very hard to try to make the Fed more ac- VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 16 nshattuck on FSR297 with DISTILLER countable to Congress. They were right. But we need to do it more effectively. Mr. WILLIAMS. One more question to you Mr. Pollock in my remaining time. When dealing with the uncertainty of the economic and financial future, you also stated in your testimony that the promotion of intellectual diversification within the organization is important. One of the proposals before us provides for at least two staff members to advise each member of the Board of Governors, independent of the Chairman’s influence. It seems to me that the Fed Governors ought to have access to unbiased advice if they are to make proper, sound decisions. So do you feel that the board has at times fallen prey to what I would call groupthink? And would this proposal help to promote the intellectual diversification that you feel is so important in dealing with uncertainty? Mr. POLLOCK. I think it definitely would. And I think a problem recognized by people who are Governors, other than the Chairman, is this fact that the staff always devotes itself to the Chairman and the dominant agenda. And this would be a very good proposal, as I said in my written testimony. Mr. WILLIAMS. Thank you for testifying. And I yield back. Chairman BARR. The gentleman’s time has expired. The Chair recognizes the gentleman from California, Mr. Sherman. Mr. SHERMAN. Democracy is under attack. The battleground is this room. And it is under attack from both the left and right. The left wants to make sure that we empower entrenched bureaucracies and protect them from public input. The right says, let’s democratize by giving more power to banks. And we need regional control; we need control outside of Washington. We need to make bank presidents control their regulation process and monetary policy. Democracy may prevail, but it doesn’t look like it. We are told that we don’t want to politicize things. That is because the enemies of democracy don’t dare claim that they are against democracy. They just say they are against politics. But politics is the only mechanism by which the voters of the country can influence or control public policy. So you are not against democracy as long as the people who are elected do not control Governmental policy. I suggest that the enemies of democracy ought to have the guts to come out and say they are against democracy instead of using the word ‘‘politicalization.’’ And as for the idea that we need local input, I couldn’t agree more. Let’s have a Class D vote that has 100 voters and have that be the 100 largest local labor union leaders. Why should banks control monetary policy when we are all talking about jobs? If we care about jobs and we want some entity other than Governmental officials to have input, why banks? They are not dedicated to jobs. Why not local labor leaders? They don’t have to be national labor, not Washington, not the national—local labor union leaders ought to be in control, or the public elected officials and the President, who is elected by the public, should be in control. But for God’s sake, why banks? VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 17 nshattuck on FSR297 with DISTILLER Now, Dr. Michel, you suggested that we have—I believe it was also Mr. Selgin—you suggested that we ought to have the FOMC rather than the Board of Governors empowered. Since that just empowers banks rather than the people of the country to a greater degree, couldn’t we marry that with the idea that these local presidents of the Federal Reserve are selected by the President or selected by local assemblies of voters or selected by any mechanism that doesn’t empower banks? Dr. SELGIN. Yes, Congressman. Well, what I am arguing for and what I think the proposal is for is not giving more power to the FOMC than it has traditionally had— Mr. SHERMAN. Well, you are going back to an antidemocratic tradition which, fortunately, we have moved away from. We took some power away from an entity that had bank control and moved it to a body selected by an elected President of the United States. So, out of a nostalgia for an antidemocratic institution, you are moving back to that. Dr. SELGIN. Well, perhaps, but the only nostalgia I am referring to lasted up until October 2008, so it is not all that nostalgic. The FOMC had the complete responsibility for monetary policy until that date when— Mr. SHERMAN. So, if we are going to do that, why not have an FOMC that is entirely reflective of a democracy? Why have bankers vote as opposed to people voting? Dr. SELGIN. Well, let’s understand— Mr. SHERMAN. Or labor union leaders. I am willing to go with that too. Dr. SELGIN. I remind you— Mr. SHERMAN. I am looking for Republican support for that idea. Dr. SELGIN. —with its existing structure, the FOMC gives an overwhelming advantage to the members of the appointed Federal Reserve Board, who have five— Mr. SHERMAN. So we will have some democracy and some bank control. Why don’t we do that for Members of Congress? Why don’t we say that three-quarters of the outcome is determined by how the voters vote and then we have a separate caucus of bankers and they control one-quarter of the vote? Wouldn’t that be a good way to depoliticize? Mr. Pollock? Mr. POLLOCK. Congressman, my suggestion is the people who really are elected by the people, namely the Members of Congress, are the responsible party for the definition and the management of money. And that is the way— Mr. SHERMAN. But we can vote to move away from democracy by setting up a commission of labor union leaders or banks to be making Governmental decisions. Mr. POLLOCK. Since labor unions are private—labor only represent about 7 percent, if I am right, of labor, I am not sure— Mr. SHERMAN. Well, I am willing to create employee councils of other institutions, too, just as soon as I get a Republican cosponsor. I yield back. Mr. POLLOCK. And, Chairman, if I could just say, I love politics, and money is political. I think you and I agree on that one, Congressman. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 18 nshattuck on FSR297 with DISTILLER Mr. SHERMAN. I yield back. Chairman BARR. The time of the gentleman has expired. The Chair now recognizes the gentleman from Oklahoma, Mr. Lucas. Mr. LUCAS. Thank you, Mr. Chairman, and thank you for holding this hearing. And, clearly, one of the few things that we all agree on in this room is that Congressional oversight of the Fed is important. And given the wide effect of Fed regulatory authority, it is important that Congress be informed when the Fed is considering new regulations. And, to that end, I will formally introduce a bill to require the Fed’s Vice Chairman for Supervision to include written testimony about any current or intended regulations before Congress. And, furthermore, my bill will ensure that testimony is given even if the Vice Chair position is vacant at the time of the appearance. And I am pleased to note that, despite some differences on other proposals at this hearing, all of the witnesses seem to agree in their written testimony that my bill has merit. Admittedly, it is a simple concept and idea, but I still would like to get your thoughts on that. So, first, I turn to you, Mr. Pollock. I realize this is a straightforward idea, which raises a question as to why this has never been an official requirement before. In your testimony, you discuss the increasing power of the Fed. If my bill were enacted, what regulatory areas under the Fed’s purview would be the most likely to show up in this new testimony, in your mind? Mr. POLLOCK. Thank you, Congressman. I think it is an important proposal and a good one. And the Fed has become, as I said in the testimony, a hugely powerful regulator. If you look at the history of the Federal Reserve, you find what I call Shull’s paradox, after a great historian of the Fed, which is: The more the Fed screws up in each cycle, the more power it gets in the subsequent political development. And this proposal would address that. I would guess that you would have to get a lot of reporting on the so-called systemic risk activities of the Federal Reserve, which is where, under Dodd-Frank, they had the biggest expansion of their power. And by being able to run the stress tests to test systemic risk, they can really, without limitation, put anything into those stress tests that they want and make it up as they go. I think the Congress would want to hear about just how that works and about the systemic risk ideas in general. Mr. LUCAS. Dr. Michel, I would ask you the same question but would also be curious how, if at all, previous Fed rulemakings would have been different if there were a requirement to provide testimony to Congress. Any thoughts, intuitions? Dr. MICHEL. Well, I think more public scrutiny is always better than less. And if the Fed is going to be involved in regulating and there is a vice chair in charge of supervision, yet that position is vacant and they are still regulating, then somebody should come up here and describe what is going on, what is coming down the pike, and so forth. So, yes, I definitely think that would be an important improvement. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 19 nshattuck on FSR297 with DISTILLER I would really quickly throw out, though, that, first of all—well, everybody has left—but I have never said the Fed is not political. And I think that is the opposite; I think it is incredibly political. It is certainly not independent from politics. And one of the reasons is because it is regulating. And, in fact, it shouldn’t be regulating. It should not be. We don’t need more than one Federal regulator. I know that nobody wants to go that far right now, but we already have more than one Federal banking regulator. We don’t need the Fed doing it, especially not since they have control over the money spigot. Mr. LUCAS. Thank you, Doctor. With that, I yield back, Mr. Chairman. Thank you. Chairman BARR. The gentleman yields back. The Chair now recognizes the gentleman from North Carolina, Mr. Pittenger. Mr. PITTENGER. Thank you, Mr. Chairman. Thank each of you for joining us today and for your continued support to this committee. Mr. Pollock, I would like to ask you a couple questions. You have served as a chief executive for a large organization, someone who is more familiar than most with how these leaders are nominated and appointed. Does it make sense for an organization to completely silence its shareholders while hiring its chief executive? Mr. POLLOCK. Congressman, I don’t think it does. As I look at the problem of electing the chief executive, you have to ask, what is the nature of a board of directors? And the board as a whole, in my judgment, should be doing that. Because all directors, even when you have special rules where some directors are elected in some ways and others appointed, all directors have exactly the same fiduciary responsibility to the organization. And one of those, one of the most important fiduciary responsibilities, is selecting the best chief executive you can. Mr. PITTENGER. Yes, sir. Thank you. To that end, would you just help clarify the role of the Class A director of the Federal Reserve banks and the role that they play, essentially? Mr. POLLOCK. In my judgment, the role of a Class A director is exactly the same as the role of any other director. All directors on any board are equally and severally and jointly responsible for doing what is in the best interest of the institution and its mission. And to divide boards into various constituency representatives is a way to destroy the functioning of the board. Mr. PITTENGER. Yes, sir. I concur. As you would understand, the Federal Reserve’s first mandate is, of course, to stabilize prices. Is there a stronger alignment of incentives in giving voice to people who make fixed-rate loans? Mr. POLLOCK. I think that if you are in the business of making fixed-rate loans or dealing with money in any sense, obviously, you have a strong interest in the monetary unit and its integrity. And that is appropriately and rightly represented in the deliberations of both the banks and should be in the board. Mr. PITTENGER. Just to confirm our thinking, if you were to buy stock in a company, would you be able to vote for the chief executive of your company? VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 20 nshattuck on FSR297 with DISTILLER Mr. POLLOCK. No. You would vote for the directors, and the directors would choose the chief executive. Mr. PITTENGER. Thank you very much. One last question for you. Should Class A directors have all of the rights and responsibilities of Class B and C directors? Mr. POLLOCK. To repeat myself a little bit, Congressman, I think all directors do have and should have the same responsibilities and, more importantly, the same duties. Mr. PITTENGER. I appreciate the clarification on that. Mr. Michel, can Class A directors vote for their chief executive, or did Dodd-Frank silence them as owners of their respective district banks? Dr. MICHEL. So section 1107 of Dodd-Frank removed that ability and slanted it toward, in my opinion, being handpicked from D.C. The district president would be handpicked from somebody on or connected to the board. Mr. PITTENGER. Thank you. As you know, the CHOICE Act and also the Senate’s Economic Growth, Regulatory Relief, and Consumer Protection Act contains a regulatory off ramp. While the Senate bill’s regulatory off ramp is much more limited than the CHOICE Act, it is clear that both the House and Senate see merit in this reform. Do you think that an original capital election or a regulatory off ramp is a positive reform that will reduce firms’ probability of failure in any consequent taxpayer bailout? Dr. MICHEL. Oh, yes, absolutely. So I am very glad that they are in both bills. It wasn’t advertised that way in the Senate bill, but it is an off ramp. And, in principle, it is really not that different from the one in CHOICE in terms of how it is actually put in place and who it applies to, although the CHOICE Act one, as you know, is broader. The idea is very sound. A higher equity ratio means that the bank is going to be able to absorb more of its own losses, therefore lowering the probability of failure and the need for a bailout. So this is definitely a positive direction. Mr. PITTENGER. Thank you. Mr. Pollock, do you want to comment on that? You are nodding your head. Mr. POLLOCK. I sat at this very table and testified in favor of the CHOICE Act and the off ramp, and I continue that support. Mr. PITTENGER. I appreciate your support. Thank you. I yield back. Chairman BARR. The gentleman yields back. The Chair now recognizes the gentleman from Ohio, Mr. Davidson. Mr. DAVIDSON. Thank you, Chairman. And I thank our witnesses. I really appreciate your expertise in this matter. And as we talked earlier, we have several ideas under consideration, and one is to put nonmonetary policy functions of the Fed on budget. The Federal Reserve is, of course, accountable to Congress, and that really needs to mean more than coming and answering a few questions once a year. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 21 nshattuck on FSR297 with DISTILLER And, Mr. Michel, if you could address some of the concerns I am just going to share. Chris Dodd, Senator Chris Dodd, of Dodd-Frank fame, one of the primary architects, acknowledged prior to the law’s passage that, in light of the Fed’s dismal performance before and during the financial crisis, that granting it more regulatory authority was, quote, ‘‘like a parent giving his son a bigger, faster car right after he crashed the family station wagon.’’ So he recognized that, but of course he blew right through his own advice and gave the Fed even more authority as a regulator. I am particularly concerned with actions of the Fed as regulators, and I will share a story. Prior to even thinking I would be a Member of Congress, I was a business guy. And I had a banker come talk to me and say, ‘‘You have been growing at 20-plus percent in these manufacturing companies, maybe you should just grow at 5 percent and play more golf.’’ I said, ‘‘Is that really what you want to do?’’ He said, ‘‘No, I want to loan you more money.’’ ‘‘Well, why would you say that?’’ Well, because they wanted to treat, under Basel III standards, the line of credit as if it were fully utilized, when we were using only about a third. Well, of course that weakens the balance sheet. These kinds of things have had an incredible impact on the growth rate in our entire macro economy. And so you would think, is there a law that was passed? Is this part of Dodd-Frank? No. This is simply the Fed acting as a regulator. Rulemaking, which we have oversight and review of in other regulatory agencies. The Congressional Review Act lets us rescind bad policy. But the Fed is somewhat immune to any of our suggestions. So could you address some of those concerns, sir? Dr. MICHEL. Sure. I mean, these are many of the types of concerns that I have been writing about, though I didn’t ever have as good of an example as that one. That is amazing. For years, the idea that Congress should just delegate to the Fed, go ahead and take care of all this stuff, and somehow that was democratic and somehow that the Fed is accountable for what they are doing is insane. They have gone much farther than they should have, and that is just my opinion, but this needs to be reined in in a way that there is less discretion and that they are focused on monetary policy and that no other regulator should have as much discretion to be able to do something like what happened to you. And I have to say, again, the notion that somehow they are not politicized and that politics doesn’t come into play here and that these decisions to take on these international agreements isn’t political, that is absurd. Mr. DAVIDSON. Thanks. And, Mr. Pollock, maybe you could comment on how the Federal Reserve blends this sense of credibility as a monetary policy—of course we have to have an independent monetary policy—to blur the lines and say, but—acting as a regulator here. Could you comment on that? Mr. POLLOCK. Thank you, Congressman. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 22 nshattuck on FSR297 with DISTILLER In my view, the Fed should be independent neither as regulator nor as monetary manipulator or manipulator of credit allocation and asset prices. I also would go further, perhaps, than the proposal as far as appropriations go. I don’t see any reason we shouldn’t appropriate all of the Fed’s expenses, not just the nonmonetary ones, because every dollar, as I said in my testimony, the Fed spends is, in fact, a taxpayer dollar. Mr. DAVIDSON. Yes. I appreciate that. And so that shows this is a more modest proposal. There would be some support for a stronger position. And this is hopefully something that can reach some bipartisan support. I was encouraged to hear Mr. Sherman, in his opening remarks, talk about some concern for the lack of accountability for Federal agencies to this body. I guess in my last few seconds here I would like to just throw out there one of the concerns highlighted by the rulemaking activity on short-term credit. The other thing is, in their conduct of monetary policy, the Fed has been swapping short-term money for long-term money. And what has been the effect of that on the growth rate of our economy, in your assessment? Mr. POLLOCK. Congressman, if I could try on that one, the clear effect has been that, de facto, it has radically shortened the maturity structure of the debt of the United States and made the expenses of the debt going forward very vulnerable to higher shortterm interest rates. Mr. DAVIDSON. Thank you. My time has expired, and I yield. Chairman BARR. The gentleman’s time has expired. The Chair recognizes the gentlelady from New York, Ms. Tenney. Ms. TENNEY. Thank you, Chairman Barr. And thank you to the panel for a really great discussion. I am also a small-business owner. I am going to talk about a couple other things, but I loved the conversation about we keep talking about democracy, but when you have centralized power, how can you have democracy? I keep thinking of Milton Friedman somehow. But, anyway, I really wanted to talk about a couple pieces of legislation that I have that deal with the Federal Open Market Committee and the blackout period, which Mr. Michel referenced. And there seems to be some ambiguity between the Congressional Members about the Federal Open Market Committee and about monetary policy. And the current structure of the blackouts results in the Federal Reserve’s staff and employees don’t have access to Congressional briefings—or we don’t have access—they are denying congressional briefings to us during these blackout periods. And my legislation aims to codify the policy but also explicitly provides that it does not apply to the Fed’s supervisory and regulatory powers, and to give us an opportunity to know what is going on with the Fed. And I just wanted to—I know, Mr. Michel, you mentioned this in your comments initially, but do you believe that the legitimate Congressional accountability is compromised when Fed officials and staff refuse inquiries about supervisory and regulatory matters by invoking the blackout period surrounded by the Federal Open Market Committee? If you could just give me a quick explanation. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 23 nshattuck on FSR297 with DISTILLER Dr. MICHEL. Yes. And it becomes a fig leaf of sorts that they can hide behind for no real reason to stall—at the very least, stall from giving Congress answers to questions that they deserve the answers to. Ms. TENNEY. Right, so less transparency. So you would support us requiring them to give an opportunity to speak instead of hiding behind these blackout periods? Dr. MICHEL. Yes. Ms. TENNEY. Thank you. Just to switch gears for a second, I want to talk about the ability of the Federal Open Market Committee’s role in the interest on excess reserves. Back in 2006, Congress passed the Financial Services Regulatory Relief Act, which authorized the Federal Reserve to pay interest on excess reserves at reserve banks. I know we had a little bit of discussion on this already. However, when the bill was amended, it allowed the Board of Governors, not the entire Federal Open Market Committee, to set the rates. The interest rate paid on reserves is set by the board and now serves as an additional instrument for conducting monetary policy. So the theory goes. Let me ask—and I think I would just want to jump down and talk to Mr. Selgin. Would you be supportive of legislation to shift the responsibility to set interest rates on reserves from the Board of Governors to the FOMC so that the district bank presidents who are voting members of the FOMC would be able to participate in a process that has now become a central tool of this monetary policy that we have referenced today? Dr. SELGIN. I would indeed, Congresswoman. I believe that the decision to place monetary policy decisionmaking with the FOMC, which was a decision that prevailed until recently, represented, itself, a very reasonable compromise between placing all power in the hands of the appointed board members and placing power in the hands only of the district banks, which is where it used to be before 1935. So we had a nice compromise, a compromise that actually weighs in favor of the board. And now, inadvertently, the law has taken the compromise and undone it, giving all the power to the board. And this was inadvertent. Congress didn’t intend this to happen. And I don’t understand why Congress would allow it to continue this way, even though they didn’t design it or intend it to happen in the first place. Ms. TENNEY. Yes. And to reference Mr. Pollock saying, let’s go back to having Congress exercise its full Article I, Section 8 powers over the Fed—so you agree that the full mix of having the FOMC, meaning including Board of Governors and regional banks, would be the better way to determine what the reserve rates are? Dr. SELGIN. I do. Right now, suppose that the FOMC as a whole voted for a 2-percent upper bound to the target rate but the board favored a 2.5— that is, the board members favored a 2.5 percent rate. Legally, the FOMC would have no power to prevail over the board in this case. Now, the board might listen to the Fed presidents, but it doesn’t have to by law. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 24 nshattuck on FSR297 with DISTILLER This is a very undesirable situation because it is unintentional and it undoes a compromise that was reached legally and understood by everyone to be reasonable in a manner that no one discussed or approved of or debated. And this is not how laws and how the Fed should be reformed. It should be reformed in this room deliberately, not as a matter of inadvertent developments outside of Congress. Ms. TENNEY. Thank you very much. My time has expired. Thank you. Chairman BARR. The gentlelady’s time has expired. The Chair recognizes the gentleman from Indiana, Mr. Hollingsworth. Mr. HOLLINGSWORTH. Well, good afternoon. I appreciate all of the witnesses being here. And certainly much has been talked about with regard to accountability, all of which I agree with. That is the direction we need to move in, accountability to the people and, as Mr. Pollock said, perhaps not to the executive. There is a long, sordid past of central banks being accountable to executives that ends poorly. But one other thing I wanted to talk about was a little bit about the underlying economics. And I know Dr. Selgin on several occasions has remarked about some of the grave deleterious effects of totally supplanting open market operations with IOER and IOR. And I wondered if you might review a little bit of that with us, not the accountability and decisionmaking but just the underlying policy itself and some grave concerns surrounding that. Dr. SELGIN. Yes. Thank you, Congressman, for the opportunity. It is very odd that we got to this situation where interest on excess reserves has become our monetary policy tool. I want to remind the committee that, when the Fed implemented interest on excess reserves in October 2008, it was concerned that there might be too much inflation in the economy and wanted to make sure monetary policy wasn’t too loose. Interest on excess reserves was designed to get banks to hoard all the fresh reserves the Fed was creating. And, in retrospect, it is pretty clear it contributed to the collapse of the economy that took place in the months after its implementation. Yet, despite that collapse, the Fed decided to keep that mechanism, that instrument in place so that, even after it created several trillion dollars of fresh reserves through its quantitative easing, those reserves also piled up, as might have been expected, and the stimulus effect was less than it should have been. Since then, the Fed has consistently failed, as has been mentioned, to reach its 2-percent inflation target. Well, don’t you know? Maybe that has something to do with the fact that, no matter how many reserves banks get, they tend to just sit on them, or at least the bigger banks in New York and many foreign ones are sitting on them, where they cannot be serving the needs of the American economy, let alone contributing to an increased inflation rate. Mr. HOLLINGSWORTH. Right. And for the dozens of Americans watching this and keeping score at home, I think the summary is that, otherwise, these banks would be lending out to consumers, out to businesses, who could productively invest that capital, use that capital to grow the econ- VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 25 nshattuck on FSR297 with DISTILLER omy. Those reserves and excess reserves are now sitting at the Federal Reserve not creating economic growth. And that output gap that we have seen be very large over the last decade has ensued, leaving many of my constituents back home wondering about their financial future and their business’s financial future. Dr. SELGIN. Indeed. If I may add to that, before the crisis—before interest on reserves, rather, banks lent approximately all of their reserves. That is, they held no excess reserves. So loans were about equal to 100 percent of the bank’s assets, almost. After interest on reserves, excess reserves became 20 percent of bank’s assets— Mr. HOLLINGSWORTH. Right. Dr. SELGIN. —and loans became 80 percent. Mr. HOLLINGSWORTH. Right. I think many of my constituents would be shocked to learn, reading in the papers over and over again throughout the crisis and afterwards there is no loan growth and people aren’t taking out loans, that we are here encouraging banks not to make loans by paying above-market interest rates on excess reserves parked at the Federal Reserve. And I think that they would be astonished to discover that. I wanted to transition a little bit to a topic and maybe go back to the 30,000-foot level and talk overview. And I was going to ask you this, Dr. Michel. The U.S. banking system has been especially prone to crises and volatility over the last 100 years, maybe even compared to our developed-world counterparts. And I was curious if you could talk a little bit about what your view is on how the Federal Reserve may or may not have contributed to some of that volatility over time in, as you said earlier, some of the politicization of decisions but also just some of the policies that they put in place maybe without some forethought as to how those might have impacts on the real economy. Dr. MICHEL. Sure. It has contributed to a lot of volatility. It has a really great track record if you look at only the so-called great moderation and if you ignore everything else. Mr. HOLLINGSWORTH. Right. Dr. MICHEL. But, on the whole, the United States banking system has been the most volatile of pretty much any developed nation. Mr. HOLLINGSWORTH. Right. Dr. MICHEL. And the Fed has contributed to that mightily. I, personally, don’t throw out the Great Depression. That was a pretty big one. That was a pretty big mistake. Mr. HOLLINGSWORTH. Right. Dr. MICHEL. And, ironically, they made almost exactly the same mistake in the last crisis by having the money supply tightened up too much at exactly the wrong time. Mr. HOLLINGSWORTH. Right. Sorry, I am running out of time. The last thing I wanted to ask you about was real GDP targeting. I know that you and I have talked about this on several occasions, but I know the Federal Reserve’s first mandate, to maintain stable prices, has been talked about, that 2-percent growth in prices may or may not be stable. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 26 nshattuck on FSR297 with DISTILLER Do you have a view on real GDP targeting versus what we are currently doing with the first mandate? Dr. MICHEL. Yes, I think that would be a much better approach than either the dual mandate that we have or even just a single price stability target. It is more flexible, it is easier to implement in terms of the information that you need, and it is more forgiving. Mr. HOLLINGSWORTH. Right. I appreciate that. I yield back. Chairman BARR. The gentleman’s time has expired. The Chair recognizes the gentleman from Minnesota, Mr. Emmer. Mr. EMMER. Thank you, Mr. Chair. Thanks to the panel for being here. Very quickly, according to The Wall Street Journal, Lloyd Blankfein, Goldman Sachs’ CEO, appears to see the considerable increase in bank regulation as a competitive advantage, observing that, quote, ‘‘more intense regulatory and technology requirements have raised the barriers to entry higher than at any other time in modern history. This is an expensive business to be in if you don’t have the market to share in scale,’’ close quote. Mr. Pollock, we are all familiar with the term ‘‘too big to fail.’’ Did Mr. Blankfein’s comments suggest that recent financial regulations are encouraging banks to become too big? Mr. POLLOCK. Congressman, I don’t think there is any doubt about the fact that intense, complex, burdensome, expensive regulation favors big banks or big organizations of any kind versus small ones, because big organizations have the scale to build internal bureaucracies to set against the Government bureaucracies and little ones don’t. So it is a tipping of the competitive advantage toward big organizations. Could I make one comment— Mr. EMMER. Please. Mr. POLLOCK. —just to my colleague Mr.—your friend— Mr. EMMER. Dr. Michel. Mr. POLLOCK. —Dr. Michel. And that is, he gave the Fed credit for the ‘‘great moderation,’’ which was really the great overleveraging leading to the disaster. Dr. MICHEL. For the record, I just said they had a good reputation. I didn’t say it was— Mr. POLLOCK. Fair enough. Mr. EMMER. So, that aside, if you go back to 2008, there were roughly a little over 8,000 community banks in this country, the mainstream banks that are basically the backbone of our small communities all across this country. And I know in our great State of Minnesota they are incredibly important to small-business creation, to entrepreneurs that have an idea and they are starting a business in their garage. And we have all kinds of examples; Medtronic is one that comes to mind in Minnesota. Those banks—and I guess, Dr. Michel, since you were called out, did those banks cause—those community banks, did they cause the crash in 2008? Dr. MICHEL. No, they didn’t. And they are being punished for things that they didn’t do with more regulation. And that is nothing new. This is a very long-term trend, as I am sure you are VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 27 nshattuck on FSR297 with DISTILLER aware of. This has been going on for decades, in terms of more regulation being hoisted on the banks, creating the incentive to get larger. And the flip side of that, of course, is that you are too small to succeed if you don’t grow— Mr. EMMER. Well— Dr. MICHEL. —or merge. Mr. EMMER. And if I can interrupt, because this is a great discussion. We never have enough time. We seem to have some folks at the Fed who think the reason that we are losing these small banks—and you need every financial institution in the financial services food chain. And we seem to be sucking all the small ones up into the bigger ones, and creating this inverse pyramid that actually could set us up for a bigger problem in the future. But they will say to you things like, ‘‘Well, it is technology. The smaller banks can’t keep up because of the technology.’’ I know it is more complicated than this, but isn’t it a combination—and it involves the Fed, which we are trying to solve some problems, hopefully, in this Congress. Isn’t it a bigger problem that every time there has been a problem with the financial system in this country, good-meaning people come in and give all kinds of new authority, maybe, or they look the other way and the Fed takes more authority, or other agencies, and they try to solve the problem but they squeeze down even harder on these smaller institutions that can’t play? And then you have them keeping interest rates at zero for how many years so nobody can even make any money in the business. I mean, isn’t that the real problem for why you are killing the lower end of the financial services food chain in this country? Dr. MICHEL. It is certainly accurate that they have been squeezed more for every problem that comes up. If you look at Basel, that is great example. The Basel requirements were forced on all banks. That is ridiculous. They were never meant to apply to any bank that is not internationally active. Mr. EMMER. The First Bank of Hallock, for instance, doesn’t really care what is going on overseas, right? Dr. MICHEL. Right. After the S&L crisis, from corrective action, things were changed again. Smaller banks got the brunt of that. And, frankly, the FDIC resolution process adds to the concentration as well. Mr. EMMER. I am going to stick with you. I am sorry. We have something going. So I want to just—with the couple of seconds left—well, no, it is—the question I have for you, since Mr. Pollock called you out, the question I have for you is: In a democracy, in a society that is supposed to be a Government by the people, why wouldn’t we want an institution like the Fed to be more transparent and more accountable? Dr. MICHEL. I think we do want it to be more transparent and more accountable. I think that is exactly the way we should go. There should be no secrets there. This isn’t dropping bombs on people. This is the economy. This is monetary policy, regulation. Everything should be out in the open. Mr. EMMER. Thank you. And yet I think it has that effect on some people. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 28 nshattuck on FSR297 with DISTILLER Thank you, Mr. Chairman. Chairman BARR. The gentleman’s time has expired. The Chair now recognizes the gentleman from West Virginia, Mr. Mooney. Mr. MOONEY. Thank you, Mr. Chairman. So, in the discussion drafts today, I have a bill that regards transparency. I am a big believer in a voters’ Government, knowing what Government is doing at all times. So my bill requires the Fed to post on a public website the annual salary and benefits of any employees whose salary exceeds that of a GS–15 Federal employee. We also, in my bill, provide for at least two staff positions to advise each member of the Board of Governors. And so they answer to that Board of Governors member, hired by and answer to them, not the overall board but just to that Board of Governors member, and to be able to provide advice to that Governor independent of the Chairman’s influence. Regardless of who the Chairman is or which politicians are in charge, we want these Governors to have independent analysis available to them. And we also subject the Fed employees to the same ethical standards as Securities and Exchange Commission employees. So my question, to no one in particular, whoever feels most ready to comment on it: Do you believe that the members of the Board of Governors can actually participate in honest and thorough deliberation and provide critical feedback to rules from staff, the Chair, and the Vice Chair for Supervision, if they do not have their own economic and legal advisors in each Governor’s office? Sure, Mr. Pollock. Mr. POLLOCK. I strongly support that proposal, Congressman, to give that staff for diversification of the thinking and the deliberations of the Federal Reserve. I also support the other provisions in your bill. Mr. MOONEY. Thank you. Dr. Baker? Dr. BAKER. I would just very quickly say, I would say I would support the proposal with a couple reservations. One is I think you may want to go somewhat higher up in terms of who has to make full disclosures, because the salaries do seem relatively low for a senior economist in Washington, D.C. The other point is, as much as I do agree, I think it is a good idea to have two dedicated staff from my casual conversations with Governors over the years, they didn’t feel that they lacked access. Now, that could just be who I happened to talk to, but they didn’t feel they lacked access to Fed staff. Mr. MOONEY. OK. Dr. SELGIN. I had the opposite impression from various Fed bank presidents who I have spoken to over the years, that they could use some— Mr. MOONEY. Additional staff? OK. Dr. SELGIN. —extra staff for purposes of participating in the FOMC deliberations. Mr. MOONEY. Thank you. I do have another on a totally separate topic, and it is actually for you, Dr. Selgin, so if you could keep your mic on there. In your testimony, you mentioned the level of interest being paid on re- VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 29 nshattuck on FSR297 with DISTILLER serves. And so it is actually a three-part question. Let me ask the whole thing, and I will yield to you. Is the level of interest being paid on reserves unlawful? That is, given the interest on both required and excess reserves stands above the Fed fund rates and overnight repo rates, isn’t interest being paid on reserves above the general level of short-term interest rates? And if interest on reserves is above the general level of short-term rates, then doesn’t it violate the 2006 authorizing legislation? I yield to you. Dr. SELGIN. So those are excellent questions. And I think that the answer is, if it ain’t illegal, it ought to be. And the reason I am putting it that way is that, under the statute, the Fed has the right to define how the law should be carried out. And it has defined the general level of short-term interest rates to be something that could include its own discount or primary lending rate. And so it has gotten out of the letter of the spirit of the law, though it is conforming with what is, under current regulatory procedures, the letter of the law. I think that the problem is the law itself was too vague. It should specify exactly and reasonably what the ‘‘general level of shortterm interest rates’’ means, using market short-term rates that are truly short-term and that are appropriately low-risk. And, by that measure, the Fed is definitely breaking the law right now, if you use an appropriate market rate. Mr. MOONEY. OK. Well, thank you. And I am just going to make a commentary in the last 40 seconds that I have on another separate issue. I was very interested in Dr. Pollock’s testimony, particularly about how the banks, the Treasury and the Fed Reserve banks are used to finance wars. You mentioned that in your testimony. I think the American public could learn a lot more and research that a lot more. And you mention in here wars back from the founding of our country, Napoleon, King William’s war on the continent. You talk about the First World War, the Korean War. And then you talk about President Nixon trying to push monetary actions for the coming elections. I seem to recall George Herbert Walker Bush commenting on the Clinton election in 1992, if the rates hadn’t changed, it would have been a different election outcome. I would love to see a separate paper just on that issue. Don’t go off on all the—just specifically on that issue, how monetary policy and bank reserves are used politically for either wars or campaign purposes. And I would love to see that separately. I yield back, Mr. Chair. Chairman BARR. The gentleman yields back. The Chair now recognizes the gentleman from Arkansas, Mr. Hill. Mr. HILL. I thank the Chairman and the Ranking Member for this continued discussion on how we can make the Fed more accountable. And I appreciate the hard work of each member on their bills that we are discussing today. I was thinking, Mr. Pollock, that your testimony smacks of economic historian, that that is clearly a driving interest of yours. And VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 30 nshattuck on FSR297 with DISTILLER so it made me just reflect on your knowledge of the Constitution. Is the Federal Reserve in the Constitution, Mr. Pollock? Mr. POLLOCK. Not specifically, for sure. Mr. HILL. And so, in 1913, the Federal Reserve Act was passed. Who passed that act? Mr. POLLOCK. It was passed by the Congress of the United States and signed by President Woodrow Wilson. Mr. HILL. Yes. And so then we amended it in 1935, I believe you said, and 1977 and 1978. Was Congress meddling in the independence of the Federal Reserve in 1935 and 1977 and 1978? Mr. POLLOCK. In my opinion, Congress was carrying out its constitutional duties to oversee the Federal Reserve. Mr. HILL. Yes. And I assume you know that the Constitution has a section about the judiciary, right? So the Judiciary Branch of the Government, is that an independent branch of the Federal Government? Mr. POLLOCK. Yes, Congressman, it is. Mr. HILL. So every year in Congress, we try to pass the Financial Services and General Government Appropriations Act. Are you aware that the Judiciary Branch of the Government is subject to appropriations in the Congress? Mr. POLLOCK. As, in my opinion, it should be, Congressman. Mr. HILL. Do you feel the Judicial Branch lacks independence because of that? Mr. POLLOCK. No, I do not. Mr. HILL. I appreciate it. I yield back the balance of my time. Chairman BARR. The gentleman yields back his time. And with the indulgence of the panel, I may embark on one additional round of questioning. And if any other Members want an additional round, I will be happy to recognize them as well. I may not take the full 5 minutes, but I do want to discuss the legislative proposal that is in front of us relating to changing the voting rights of all of the FOMC members to an annual basis. As you know, under today’s anachronistic voting rotation, the FOMC policymaking occurs with some Federal district banks voting once every 3 years, others voting every year, specifically New York, and then two: Chicago and Cleveland, every other year. And that is the rotation of the district bank presidents. Of course, as you know, the Board of Governors are voting all the time. And the proposal before us would change that so that every district bank president would be voting, have full voting rights every year all the time, just like the Board of Governors, the Governors, would continue to have their voting rights. And so all members of the FOMC would actually be voting on monetary policy decisions at all times. Let me ask, Mr. Pollock, how did the current voting rotation of— and I am asking you to be a bit of a historian here. How did the current voting rotation of district bank presidents come into being? Is it possible that economic changes across these districts over time has made that rotation especially anachronistic? And if the current rotation is less than representative, by giving an outside voice to certain economies and a larger-size voice for VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 31 nshattuck on FSR297 with DISTILLER other economies, why wouldn’t we want to give each district a vote in every meeting? Mr. POLLOCK. Mr. Chairman, to begin by answering the question at the end, I think we should. The Federal Reserve Act originally in 1913 did not have an Open Market Committee provision in it. The Open Market Committee was invented by the Federal Reserve banks during the 1920’s as a committee of the banks themselves when they found out that they could do things in the Government bond market which weren’t originally thought of in the act. In 1935, as part of the centralization of the Fed pushed by Marriner Eccles, because he was a powerful personality and he wanted to run it, they made the Federal Open Market Committee into statute with the voting that we have now. Of course, Cleveland and Chicago arguably had a much more powerful economic position at that point than now. And New York has its continued position as a financial center, but I don’t think we really want a Washington-New York axis. A whole-country representation would, in my opinion, be better. I just want to say, when it comes to voting, if you are afraid that the presidents would out-vote 7 Governors, if the presidents voted 9 against and 3 for and all the Governors voted in favor, the Governors would still win 10-to-9 under the proposal. You would have to have 10 banks voting against, out of 12, to defeat a unified board. And I think if you had 10 Federal Reserve banks opposing a proposal, you should really think carefully and withdraw it for more discussion in any case. Chairman BARR. Thank you for that. And, Dr. Selgin, I will ask you to comment on that as well. And, as you do, I will just bring to your attention the fact that—and it will probably not surprise anyone here—that Governors—and I will preserve their anonymity—have pushed back on this concept with me and others Members of Congress, and they have made the argument that the current system works pretty well the way it is and that it is a balanced system the way it is. What is your response to that line of critique? Dr. SELGIN. Well, my response would be that some people have a different idea of what it means for an institution to be working well than others and that I think that the presumption that we can’t improve the working of the Fed reflects a great deal of optimism or perhaps a great deal of complacency upon anyone who holds it. As for the current composition of the FOMC, it seems to me that among the more obnoxious particulars of that is the fact that the New York Fed has a constant representation on that board, whereas the other regional banks only have occasional representation. This truly is anachronistic. It dates back to the days before the 1935 act, when New York exercised a great superiority of influence compared to the other banks, though somewhat unofficially. The problem that many people recognize with the overarching influence of certain segments of the banking industry on the conduct of Federal Reserve policy is chiefly a problem of Wall Street influence. It is not a problem of influence of bankers in other parts of the country. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 32 nshattuck on FSR297 with DISTILLER So, if you are concerned about that, let’s change this provision of the law dictating who is on the FOMC. Chairman BARR. My time has expired. Thank you for your answers. And I will now recognize the Ranking Member for an additional round. Ms. MOORE. Well, Mr. Chairman, I would like to use my time to enter a couple more letters into the record: A letter from the Conference of State Bank Supervisors, which is a nationwide organization of banking regulators in all 50 States, American Samoa, D.C., Guam, Puerto Rico, and the Virgin Islands. They object to the portions of section 1 of the draft that would impose a tax on State-chartered banks. They argue that small banks, the smallest State-chartered community banks would be hit the hardest since they will be required to pay the same fee as larger banks. Also, I would like to enter into the record— Chairman BARR. Without objection. Ms. MOORE. —a letter from the Center for Popular Democracy’s Fed Up coalition. They specifically object to the presidents of all 12 regional reserve banks being made permanent members of the Federal Open Market Committee. And so, without objection, I would hope that you would enter that into the record. Chairman BARR. Without objection. Chairman BARR. The gentlelady yields back. The Chair now recognizes the gentleman from Ohio for another round. Mr. DAVIDSON. Thank you all. And thanks for the opportunity to ask some additional questions. And, Dr. Michel, as I was referencing earlier, in the rulemaking practice of the executive branch, there is a pretty established protocol. And some would hope for even more transparency there, but there is a path where they publish a rule, and there is a comment period. Have you seen the Fed act as a regulator consistent with that? Is it transparent, how they make rules? Or do they take positions if banks, for example, have a line of questioning to say, hey, would this be permissible? Is it easy to get guidance from the Fed as a regulator? Dr. MICHEL. I have heard a lot of horror stories that it is not. I know that there have been a lot of conflicts in the past, not from just hearsay. I know there have been a lot of conflicts between the Federal regulators, the Fed being at the heart of that. I also know that they have gone off on their own and done a rulemaking on their own after doing a joint rulemaking that they decided they didn’t like anymore. The high-quality liquid assets is the last one, the most recent one, that comes to mind. And on top of that you have a supervisory problem, in that you have—it is widely discussed in the community, banking community, that the Fed supervisors will come in and say something. There is no statute, there is no guidance. They just decide that you can or can’t do something, and they intimate that you can or can’t do something, and then you can’t do it. VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 33 nshattuck on FSR297 with DISTILLER Mr. DAVIDSON. Right. So to highlight a couple practices, not that these were inherently Federal Reserve issues, but things that were creative, I will grant the prior Administration, creative, but things like redlining and Operation Choke Point, where, using the power of a regulator, they are basically saying, ‘‘Hey, we are concerned about your reputation, you can’t bank these people,’’ even though they have no debt, they simply want a depository account, and telling banks, ‘‘No, you have to keep this branch open,’’ even though you lose money there, it has been robbed 10 times, and it is a bad investment, or you have to make a bad investment in order to make good ones in other markets. There is a heavy hand of regulation that has been established in the past. And so, when those things happen, it is nice for Congress to be able to step in and interject. And I would make a persistent plea to our colleagues or counterparts over in the Senate to take action on the CHOICE Act and help us do bigger reforms. And, Dr. Selgin, I guess, are there concerns that you have in the regulatory lane that Congress, were they able to do more than ask a couple questions a few times, would be able to provide guidance that is clearly within the lane. And as my colleague Mr. Hill highlighted, not only is the judiciary on appropriations, Congress gives them guidance on all sorts of things in a regular fashion. Dr. SELGIN. I think the Congress ought to be able to ask the Fed about anything at any time. And I think it ought to be able to inform itself about the subjects of any inquiry it wants to undertake. I don’t believe that any barriers to congressional inquiries concerning the Fed are appropriate. And I don’t understand the opposition of Federal Reserve officials and others to improving the basis for congressional oversight. I understand it, rather. I understand it, but I see it as a foible rather than something defensible. Mr. DAVIDSON. Well, in general, the regulatory approach for any executive agency or any autonomous agency is an executive action where they are implementing, and the rulemaking or legislating is done by this body, according to the Constitution. So, Dr. Pollock, any closing thoughts on that? Mr. POLLOCK. I do have one. Thank you very much, Congressman. In the 1960’s, on the 50th anniversary of the Federal Reserve, a Democratic Congressman, Wright Patman, held extensive hearings on the Federal Reserve and the ability of Congress to direct it. And he extracted the following testimony, which I think is excellent, from the then-president of the New York Federal Reserve Bank, who testified: ‘‘Obviously, the Congress, which has set us up, has the authority and should review our actions at any time they want to in any way they want to.’’ I think that sums it up pretty well, Congressman. Mr. DAVIDSON. It sounds a lot like the Congressional Review Act. And putting them on appropriations would be a suitable way to make sure we have that capability. Mr. Chairman, I yield. Chairman BARR. The gentleman yields back. And, with that and with the call of the votes, I would like to thank my colleagues for their thoughtful proposals for our consider- VerDate Sep 11 2014 13:08 Oct 09, 2018 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 G:\GPO PRINTING\DOCS\115TH HEARINGS - 2ND SESSION 2018\2018-01-10 MPT FURT 34 nshattuck on FSR297 with DISTILLER ation today, and I would like to thank our witnesses for their testimony and their reaction to these proposals. Without objection, all Members will have 5 legislative days within which to submit additional written questions for the witnesses to the Chair, which will be forwarded to the witnesses for their response. I would ask our witnesses to please respond as promptly as you are able. Again, thank you to our witnesses for your testimony. This hearing is now adjourned. 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@FedFRASER