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THE FEDERAL RESERVE’S IMPACT ON MAIN STREET, RETIREES, AND SAVINGS HEARING BEFORE THE SUBCOMMITTEE ON MONETARY POLICY AND TRADE OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED FIFTEENTH CONGRESS FIRST SESSION JUNE 28, 2017 Printed for the use of the Committee on Financial Services Serial No. 115–25 ( U.S. GOVERNMENT PUBLISHING OFFICE WASHINGTON 28–222 PDF : 2018 For sale by the Superintendent of Documents, U.S. Government Publishing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\28222.TXT TERI 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 ´ ZQUEZ, New York NYDIA M. VELA 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 KIRSTEN SUTTON MORK, Staff Director (II) VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\28222.TXT TERI 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 (III) VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 K:\DOCS\28222.TXT TERI VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\28222.TXT TERI CONTENTS Page Hearing held on: June 28, 2017 .................................................................................................... Appendix: June 28, 2017 .................................................................................................... 1 41 WITNESSES WEDNESDAY, JUNE 28, 2017 Dynan, Karen, Nonresident Senior Fellow, Peterson Institute for International Economics .............................................................................................. Kupiec, Paul H., Resident Scholar, American Enterprise Institute .................... Michel, Norbert J., Senior Research Fellow, the Heritage Foundation .............. Pollock, Alex J., Distinguished Senior Fellow, R Street Institute ....................... 9 7 5 10 APPENDIX Prepared statements: Dynan, Karen .................................................................................................... Kupiec, Paul H. ................................................................................................. Michel, Norbert J. ............................................................................................. Pollock, Alex J. ................................................................................................. (V) VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00005 Fmt 5904 Sfmt 5904 K:\DOCS\28222.TXT TERI 42 49 74 93 VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00006 Fmt 5904 Sfmt 5904 K:\DOCS\28222.TXT TERI THE FEDERAL RESERVE’S IMPACT ON MAIN STREET, RETIREES, AND SAVINGS Wednesday, June 28, 2017 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 10:06 a.m., in room 2128, Rayburn House Office Building, Hon. Andy Barr [chairman of the subcommittee] presiding. Members present: Representatives Barr, Williams, Huizenga, Pittenger, Love, Hill, Emmer, Davidson, Tenney, Hollingworth; Moore, Foster, Sherman, Kildee, and Vargas. Chairman BARR. The Subcommittee on Monetary Policy and Trade will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. Today’s hearing is entitled, ‘‘The Federal Reserve’s Impact on Main Street, Retirees, and Savings.’’ Before I get any further, I would like to take a moment of moment of personal privilege to talk about the tragic shooting that happened at the Republican Congressional baseball practice exactly 2 weeks ago today. Our thoughts and prayers remain with our friend and colleague, Steve Scalise, and his family, especially his wife Jennifer. Zach Barth, who is a good friend of Roger Williams’ aide, was shot in the calf and is recovering well. We are happy to report he will be throwing out the first pitch at the Houston Astro’s baseball game on July 4th, Independence Day, against the Yankees. I think Representative Williams had a lot to do with that. Matt Mika, the Tyson’s Foods employee, was shot multiple times. We are happy to say that he has been discharged from the hospital. And we commend the heroic actions of Crystal Griner, the Capitol Hill Police officer who was shot in the leg, and David Bailey, a special agent for the Capitol Police, who was also injured. And then our good friend, Roger Williams, the Vice Chair of this subcommittee, was injured. We are just so grateful for his recovery, and we are so glad to have him with us here today, 2 weeks after that incident. I will now recognize myself for 3 minutes to give an opening statement. Measured in terms of length, the Great Recession is hardly remarkable. At 18 months, it ties 5 others as our 8th longest recession. So what is remarkable about the Great Recession? In a word: severity. The Los Angeles Times documented how more than half (1) VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 2 of adults lost a job or had a cut in pay or hours, and almost everybody’s wealth fell. Unfortunately, our recovery has not been great. Out of recession for 8 years, households and businesses continue to fall short of their potential. Every other postwar recession saw a considerably faster rebound. Our questions for today’s hearing are motivated by this disappointing economic performance. Why did the resilience of hardworking Americans go missing this time around? Did monetary policies contribute to or mitigate this disappointing recovery? And how did these policies affect our economy for savers, retirees, and Main Street? Monetary policy was, at best, late to react. The New York Times reported that, ‘‘Federal Reserve officials were unaware in January 2008 that the economy had already entered a recession.’’ If monetary policy does not work, then our economy cannot work. This concern is more than academic. The Federal Reserve looked past monetary policy’s fundamental service to our economy, that is providing clear price signals so the goods and services can easily find their most promising opportunities. Instead of strengthening fundamentals to rebuild our economy from the ground up, the Fed engineered a financial reflation from the top down. But the promised Keynesian nirvana never came. Households and businesses saw through the Fed’s artificial economic sweeteners and focused, instead, on mitigating a new normal of rapidly mounting policy distortions. America’s hallmark confidence that tomorrow will be better than today went into retreat, cracking the very foundation of what was a reliably resilient economy. Households and businesses watched almost $14 trillion of potential income go down the drain since our recovery started in 2009. Had we enjoyed a more resilient recovery, American households could have earned $100,000 more income over the last 8 years. A decade of artificial monetary support put retirees at risk of seeing interest earnings fall short of expenses. And younger savers face the opposite problem of paying higher prices for their retirement savings. Returning to a monetary policy that simply eases the trade of goods and services wherever it shows promise would improve our economy for retirees, savers, and Main Street households and businesses. A better way is available, and we should act on it. At this time, the Chair recognizes the ranking member of the subcommittee, the gentlelady from Wisconsin, Gwen Moore, for 5 minutes for an opening statement. Ms. MOORE. Thank you so much, Mr. Chairman. And I want to associate myself with your comments with regard to those injured 2 weeks ago. I have used every opportunity to keep them in my thoughts and prayers. And it is good to be here. It is good to see our witnesses. I know that retirement security is an extremely important issue facing Americans. We have baby boomers who are retiring every day. Every day, 10,000 people turn 65, and it creates real challenges for the country. The Boomers, of course, are retiring with grossly insufficient savings. But you know what doesn’t keep my up all night? The impact VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 3 of the Fed’s crisis policy on retirement savings. I am not sure how it would have served retirees for the Fed to not have acted in the face of the Great Recession and to have allowed bread lines to come back or to further the Republican austerity agenda that all of our experience shows would have been disastrous for the economy. You know what retirees need? They need the fiduciary rule that helps them save by making advisers put their clients’ interests ahead of their own. They need Medicaid, because they might find themselves in a nursing home. The massive Medicaid cuts that the Republican House, passed and the Republican Senate has right now under their jurisdiction, will absolutely devastate retirees. That is what keeps me up at night, not what the Fed did. Savers need a robust CFPB making sure financial hucksters and fraudsters are not draining the hard-earned money of consumers. Savers need a strong Dodd-Frank Act that safeguards the financial market. The growth is not despite Dodd-Frank, it is because we have not had booms and busts, and markets are free from fraud. I am 100 percent confident that my Democratic colleagues and I are 100 percent on the side of savers. I want to yield the balance of my time to Representative Foster. Mr. FOSTER. Thank you, Mr. Chairman, and Ranking Member Moore. I think one of the reasons that we have a lot of—both parties talking past each other in a lot of these things and often coming up with imaginary scenarios of what might have happen. It is one of the realities of politics that you don’t get controlled experiments the way you do in science. You can’t restart and set up a parallel universe and find out what would have happened without the aggressive monetary actions by the Fed during a crisis. It would be a very interesting experiment. We don’t have it, so we are stuck with imagined alternate scenarios. But I think when I look at the debate over monetary policy, the big problem is that we are not looking enough at the distributional consequences of this. There was what was, to me, a very influential paper on MIP actually from the Federal Reserve entitled, ‘‘Doves for the Rich, Hawks for the Poor, Distributional Consequences of Monetary Policy,’’ that came out in 2016. And it makes the point that, over the course of a business cycle, if you decide which one of the two elements of the dual mandate you are going to emphasize, it has real distributional consequences. And the other side of the coin is that even if you are focusing only on aggregate numbers like total GDP growth or household net worth, the distributional elements of that are very important in how fast our economy grows. To put it sort of bluntly, the reaction of our economy in a macro sense is very different if you give additional dollars to someone with higher net worth than someone who is part of a working family, that the working family is much more likely to let the money circulate in the local economy; the high net worth person is much likely to turn the money over to their funds manager and send a big fraction of it offshore under the standard advice of diversifying and risk. VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 4 And so I think that we have to more and more in our debate look at distributional effects. I would very much like to see the Federal Reserve every quarter come out with not just the aggregate household net worth but by quintiles or even percentiles, because I think that would very much illuminate the debate and, I think, yield a higher level of understanding of what the real constraints are on economic growth in this country. Thank you. I look forward to the hearing. I yield back. Chairman BARR. The gentleman yields back. And the gentlelady yields back. And as I said before, we are so grateful for the well-being and recovery of our good friend, Roger Williams, the Vice Chair of the subcommittee. And the Chair now recognizes the gentleman from Texas, Roger Williams himself, a Main Street businessman who suggested the topic of this hearing, for 2 minutes for an opening statement. Mr. WILLIAMS. Thank you, Chairman Barr, and Ranking Member Moore. As a point of privilege, I would like to echo the remarks you made about the tragic events that unfolded 2 weeks ago. I would also like to thank Chairman Hensarling, and the members of this committee and their staff, for the support my office has received during these difficult times. As I have said many times, events like this might slow us down, but we cannot let them deter us from doing the important work our constituents sent us here to do. So I want to, again, say thank you, Mr. Chairman, for your kind words. The economy of the United States is the largest in the world. At $18 trillion, it represents a quarter share of the global economy. Since 1854, Americans have seen their economy fall under recession 33 times. And as Chairman Barr noted earlier, the most recent recovery has been slow with sluggish growth and policies that have hurt Main Street America. Consequently, one of those policies requires the Federal Reserve to pay higher rates to banks that have excess reserves. Required reserves alone provide $110 billion in funding, less than 3 percent of the current $4.5 trillion Federal balance sheet. The troubling spike in excess reserves held at the bank has ballooned to over $2 trillion. According to former Fed Chairman Bernanke, banks are not going to lend out the reserves at a rate lower than they could earn at the Fed. Essentially, Mr. Bernanke is admitting that the Fed is paying above market interest. The excess money being held in reserve is just sitting there, not being let out, not serving an economic purpose. Clearly, the Fed has stepped far outside of the bounds of a conventional balance sheet in terms of both funding sources and size. So, Mr. Chairman, I look forward to discussing this further with the witnesses today, and I yield back the balance of my time. Chairman BARR. The gentleman yields back. Today, we welcome the testimony of Dr. Norbert Michel, a research fellow at the Heritage Foundation. His research focuses on financial markets, financial regulations, and monetary policy. He previously taught finance, economics, and statistics at Nicholls VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 5 State University’s College of Business. Dr. Michel earned his bachelor’s degree from Loyola University, and his Ph.D. in economics from the University of New Orleans. Dr. Paul Kupiec is a resident scholar at the American Enterprise Institute, where he specializes in systemic risk management, and regulation of banks and financial markets. Previously, he was the Director of the Center for Financial Research at the FDIC and has also worked at the International Monetary Fund, Freddie Mac, JPMorgan, and the Board of Governors of the Federal Reserve System. Dr. Kupiec earned his bachelor’s degree from George Washington University, and a doctorate in economics from the University of Pennsylvania. Dr. Karen Dynan is currently a nonresident senior fellow at the Peterson Institute for International Economics. Her research focuses on fiscal and other types of macroeconomic policy, consumer behavior, and household finances. She previously served as Assistant Secretary for Economic Policy and Chief Economist at the U.S. Department of the Treasury. She also will be a professor of economics at Harvard starting in July. Dr. Dynan received her Ph.D. in economics from Harvard, and her bachelor’s degree from Brown. Alex Pollock is a distinguished senior fellow at the R Street Institute, where he specializes in financial systems and central banking, economic cycles, financial crises, and the politics of finance. He previously was a resident fellow at the American Enterprise Institute, and was also President and CEO of the Federal Home Loan Bank of Chicago. Mr. Pollock earned his bachelor’s degree from Williams College, his master’s of philosophy from the University of Chicago, and his master’s of public administration from Princeton University. Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. And without objection, each of your written statements will be made a part of the record. Dr. Michel, you are now recognized for 5 minutes. STATEMENT OF NORBERT J. MICHEL, SENIOR RESEARCH FELLOW, THE HERITAGE FOUNDATION Mr. MICHEL. Chairman Barr, Ranking Member Moore, and members of the subcommittee, thank you for the opportunity to testify today. I am a senior research fellow in financial regulations and monetary policy at the Heritage Foundation, but the views that I express in this testimony are my own, and they should not be construed as representing any official position of the Heritage Foundation. The Federal Reserve has a much better reputation among economists than with the general public. And even though I am an economist, I have to side with the public on this one. Monetary policy is not working for Main Street America. And my remarks will provide four specific examples of why Americans need Congress to fix monetary policy. First, the Fed has not tamed the business cycle. When the Fed is no longer given a free pass on the Great Depression, and the entire Fed era is compared to the entire pre-Fed era, neither the fre- VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 6 quency nor severity of recessions has decreased. Even when the period between the two World Wars is excluded, updated data suggests that the average length of recessions, as well as the average time to recover from recessions, has been slightly longer during the postwar period than during the pre-Fed period. In many cases, the apparent decline in postwar volatility is literally a figment of the data. Second, the Fed has not tamed inflation unless one defines price stability in a way that is extremely favorable to what the Fed has done. For instance, the variability in inflation has declined in the postwar period, but the average rate of inflation is much higher than it was before the Fed was founded. Estimates of the annual CPI show that the average inflation rate prior to the Fed was only about 0.2 percent, whereas the average rate since the Fed has been more than 3 percent, and the variability has only dropped one percentage point. Perhaps more importantly, the Fed has been actively trying to stamp out the good type of deflation that a growing productive economy normally produces. The Fed simply doesn’t want to let prices fall, even when they should. Main Street Americans understands that when the Fed constantly fights the Walmart business model, it makes it harder for them to earn a living. Third, an inflated opinion of the Fed’s ability to control every aspect of the economy is what contributed to our recent housing boom and the consequent bust, likely worsening massive job losses, millions of home foreclosures, and billions of dollars in lost wealth. In the early 2000s, the Fed actively and openly tried to keep its Fed funds target rate below what it viewed as the natural Fed funds rate. The Fed thought that it could use the higher productivity to further boost employment without increasing inflation, so that is what it tried to do. And residential construction grew from supporting about 51⁄2 million jobs at the end of the 1990s to almost 71⁄2 million jobs at the peak of the cycle in 2005. When the crash hit, housing-related employment fell substantially down to 41⁄2 million by 2008. This means that roughly 75 percent of the drop in total U.S. employment was housing related, and the Fed simply shares some of this blame. Several measures suggest that the Fed’s policy stance was excessively tight at exactly the wrong period, thus worsening the downturn. And the Fed openly admits that starting in 2008, it sterilized emergency lending and large-scale asset purchases with the explicit intent of ensuring that those purchases would not spill over into increased private lending, and did so out of concern for its Fed funds target and inflation target, but it should have been worried about preventing aggregate demand from collapsing, and it completely failed on this front. Fourth, as a result of the Fed’s extraordinary efforts, taxpayers are left shouldering the risk of more than $4 trillion in long-term securities sitting on the Fed’s balance sheet with very little to show for it, all while a select group of financial firms received more than $16 trillion in credit at subsidized rates. The Fed’s policies have helped drive demand for safe assets through the roof, thus contrib- VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 7 uting to historically low interest rates. They have also crowded out private investment and contributed to less affordable housing. And I have left out of my oral remarks any critique of the Fed’s regulatory failures, particularly those that blessed Fannie Mae and Freddie Mac mortgage-backed securities with a preferred position in bank’s required capital framework. Congress would not be fulfilling its responsibility if it allows the Fed to continue operating under its existing ill-defined mandates where it has essentially become a broker, allocating credit to preferred sectors of the economy. And I look forward to answering your questions. [The prepared statement of Dr. Michel can be found on page 74 of the appendix.] Chairman BARR. Dr. Kupiec, you are now recognized for 5 minutes. STATEMENT OF PAUL H. KUPIEC, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE Mr. KUPIEC. Chairman Barr, Ranking Member Moore, and distinguished members of the subcommittee, thank you for convening today’s hearing. It is an honor for me to testify before the committee today. I am a resident scholar at the American Enterprise Institute, but this testimony represents my personal views. There is little doubt that the Federal Reserve is the most powerful agency in government. The Fed’s decisions have important impacts on the lives of every American, and yet, the Fed’s decisions are made by unelected officials with only limited oversight by Congress. Few Members of Congress are deeply schooled in the arcane details of monetary theory, and those who are schooled face a fulltime job just keeping abreast of the ever-changing fashions in central banking. Economists and central bank officials are continually refining the thinking that guides their policy prescriptions. In addition, Congressional Members who dare to question the propriety of the Fed’s monetary policy decisions know full well that they will be charged with the mythical crime of attacking the Fed’s independence. Countercyclical monetary policy is, at its core, a redistribution mechanism. To stimulate the economy, the Fed lowers interest rates, thereby reducing the income of savers with the hope of encouraging other groups to borrow and increase their spending. The monetary policy works as planned. It generates growth benefits that more than offset the redistribution. But in the current recovery, the theory did not work out as planned. The economy has continually performed below Fed growth targets. Moreover, the income and wealth redistributions caused by the Fed’s post-crisis monetary policies have been exceptionally large and unusually prolonged. There is little doubt that unconventional monetary policies like near zero interest rates, interest on bank reserves, and quantitating operations have had important impacts on the distribution of income and wealth in America. My written testimony includes analysis that shows that those on the less well-heeled side of Main Street, of which there are many VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 8 in America, have seen fewer gains and a weaker recovery compared to the benefits that policies have generated for a wealthy minority of Americans. Under post-crisis monetary policies, households near the top of the income distribution have received most of the wage gains as well as the QE-generated gains in stock and home values. At the same time, households outside of the top income bracket saw their wages stagnate, and those living off fixed income retirement savings saw their incomes decline. Households trying to save have had to accept near zero returns on prudent investments or gamble by investing in equity markets inflated by Fed QE programs. Fed policies benefited banks by sharply reducing their funding costs. At the same time, bank customers saw the markup they pay on bank loans and services increase. And few seem to realize that the largest banks are now more reliant on cheap, taxpayer-guaranteed deposit funding than they were at the start of the crisis. Had unorthodoxed generated the income growth that was anticipated, the Fed’s policy experiments would have been suspended years ago without generating the public dismay that has sparked today’s audit-the-Fed movement. To be clear, the Fed’s mandate to maintain price stability and maximum sustainable employment does not include any explicit obligation to consider wealth or income redistribution when formulating policy. And the current mandate is probably sensible given the fact that monetary policy is truly a blunt instrument. But the Fed is mistaken if it assumes that it will be insulated from Congressional intervention when a large share of the electorate becomes disillusioned with the Fed’s performance. The need for a more comprehensive Congressional discussion on the impacts of the Fed’s monetary policy decisions is long overdue. But thus far, Congress has been unable to catalyze this discussion. The modest size of Congressional staff provides Members with limited resources to gauge the Fed on technical discussions on monetary policy, nor is it clear that proposed legislation such as the Federal Reserve Transparency Act of 2017 will adequately address these issues. When engaged to investigate controversial financial issues, GAO studies are rarely conclusive. Congress needs a new approach. My recommendation is that Congress consider a simple procedural change that could, without any new legislation, help to level the playing field. After the Fed delivers its written HumphreyHawkins testimony, but before scheduling the Fed Chair’s testimony, the Congress could hold hearings in which outside experts evaluate the Fed’s written testimony. After such hearings, they would allow the Congress additional time and expert resources to prepare oversight questions for the Fed Chair subsequent to the Humphrey-Hawkins hearing. My guess is there is at least an even chance that once the Fed’s written testimony is subjected to expert opinion and outside review before the Fed Chair testifies, that the Fed will find it preferable to anticipate and address controversial issues in its written testimony. Especially if the Congress encourages nonaligned experts to focus on issues with which they are concerned. VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 9 Thank you for the opportunity to testify today, and I look forward to your questions. Thank you. [The prepared statement of Dr. Kupiec can be found on page 49 of the appendix.] Chairman BARR. Thank you. . Dr. Dynan is now recognized for 5 minutes. STATEMENT OF KAREN DYNAN, NONRESIDENT SENIOR FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS Ms. DYNAN. Thank you. Mr. Chairman, Ranking Member Moore, and members of the subcommittee, thank you for the opportunity to testify today. I will make five points on how the Federal Reserve’s policies have affected Main Street retirees and savers. First, accommodative monetary policy since the recession has produced a strong economic recovery in the United States. The lower interest rates resulting in the Fed’s actions reduced borrowing costs for households and businesses. They also enabled homeowners to refinance their mortgages, leaving them with more money for other things. This spurred additional spending, leading to yet more hiring and more income. Real GDP is now 17 percent above its recession low point, and the unemployment rate is at its lowest level since 2001. Indeed, as noted in a recent OECD report, our economic recovery has been stronger than in most other countries, with the report attributing our better performance partly to the best monetary policy support. My second point is that while the employment effects of the Fed’s actions have differed across people, everyone has benefited from more job growth. Someone who found a new job after being laid off during the recession undoubtedly benefited more from the Fed’s efforts to restore a healthy labor market than a neighbor who had a stable job. That said, the effects of a stronger labor market were not limited to unemployed people who found jobs. Employed people were more likely to see wage increases and to find better opportunities with other firms. The additional income generated by new and better jobs boosted household spending, helping businesses do more hiring and expand in other ways. I want to particularly emphasize the importance of restoring a healthy labor market to small businesses, because they account for so much employment, and they were hit hard during the recession. I think small businesses would have faced far greater struggles in recent years if demands for their products had been weaker because monetary policy was not sufficiently supportive. Third, the effects of monetary policy on savers have differed across people. Lower interest rates have hurt some savers by reducing their interest income, but have helped some savers by boosting stock and home prices. Increases in stock and home prices in recent years have added tens of trillions of dollars to household wealth. Overall, a relatively small amount of wealth, around 5 percent, is in interest-paying accounts, but there are differences across the VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 10 income distribution. For retirement-age households, middle- and upper-middle income income households are the most exposed to interest income losses. While we should not minimize the hardship suffered by some in this group, research has shown that the financial losses of the group from 2007 to 2011 amounted to less than 10 percent of its income. In addition, many savers, among them many retirees, are also borrowers, which meant they benefited directly from lower interest rates. Furthermore, the strong labor market fostered by monetary policy enhanced retirement security by reducing forced early retirements. My fourth point is that while the Federal Reserve should be accountable to Congress for its actions, some of the provisions in the CHOICE Act would impair its ability to support a strong economy and low and stable inflation. Studies have demonstrated that economies perform best when monetary policies are insulated from short-term political pressures. But regular GAO audits of monetary policy might discourage the FOMC from taking the actions needed to create maximum employment and stable prices particularly on unpopular actions. Furthermore, closely tying the FOMC’s actions to strict predetermined rules would hinder its ability to appropriately react to adverse developments given the complexity of our economy. My fifth and final point is that too many Americans have not saved enough for retirement, and various aspects of Federal policy apart from monetary policy should be used to enhance financial security. One way to raise retirement saving is to increase access to taxdeferred workplace retirement savings accounts. For example, Congress could adopt a proposal developed by the Brookings Institution and the Heritage Foundation under which firms would automatically enroll workers without a plan in an individual retirement account with an option, of course, to opt out of that plan. We should also protect the Labor Department’s new fiduciary rule to help savers, large and small, get a fair shake in financial markets. It is common sense to require financial advice to be in the best interest of savers. And we need to protect savers from investment fraud, including older households who seem particularly vulnerable to such abuses. To do so, among other things, we should preserve the powers of the Consumer Financial Protection Bureau. Thank you very much, and I look forward to your questions. [The prepared statement of Dr. Dynan can be found on page 42 of the appendix.] Chairman BARR. Thank you. And now, Mr. Pollock, you are recognized for 5 minutes. STATEMENT OF ALEX J. POLLOCK, DISTINGUISHED SENIOR FELLOW, R STREET INSTITUTE Mr. POLLOCK. Thank you, Mr. Chairman, Ranking Member Moore, and members of the subcommittee. I couldn’t agree more with Dr. Dynan that the Fed needs to be accountable to the Congress. I am going to discuss one particular VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 11 way in which that accountability should take place: relative to savings. There is no doubt at all that among the important effects of the Federal Reserve’s actions since 2008, up to now, has been expropriation of American savers, and that makes things especially difficult for many retirees. This, of course, has been done through the imposition of negative real interest rates on savings through a remarkably long period of 9 years. Negative interest rates would be expected from the central bank in the crisis mode. This morning, we talked a lot about the crisis, but the crisis ended 8 years ago. After that, the Fed wanted to inflate asset prices to achieve a socalled wealth effect. Well, house prices bottomed 5 years ago, and they are back up over their bubble peak. The stock market is at all-time highs. So what is the Fed doing, still forcing negative interest rates on savers at this point? The Fed should be required to explain that to Congress. I recommend that Congress require a formal savers impact analysis from the Federal Reserve at each discussion of its policies and plans with the committees of jurisdiction. Under the CHOICE Act, this would be quarterly. This analysis would discuss, quantify, and talk about the plans of the Fed as they relate to savings and savers so that these can be balanced with other relevant factors. The Fed endlessly announces to the world its intention to create perpetual inflation at 2 percent, which is equivalent to a plan to depreciate savings at the rate of 2 percent a year. Against that plan, what are savers getting? The FDIC’s June 2017 report shows the average interest rate on savings accounts is 0.06 percent. The average Money Market deposit account rate is 0.12 percent, and in no case can savers get their real yield anywhere near zero, that is to say, near the inflation rate. In other words, thrift, prudence, and self-reliance, which is what we should be encouraging, instead are being strongly discouraged. As Congressman Foster said a minute ago, we have to think about distributional consequences of the Fed’s actions—I agree with that. Overall, speaking of distribution, the Fed has been taking money from savers in order to give it to borrowers. This benefits borrowers in general, but in particular, it benefits highly leveraged speculators in financial markets and speculators in real estate. More importantly, it benefits the biggest borrower of all, the government itself. Expropriating savers through the Federal Reserve is a way of achieving unlegislated taxation. One term for this is financial repression, and financial repression is what we have. By my estimate, the Federal Reserve has taken since 2008 about $2.4 trillion from savers. The specific calculation is shown in the table, which is included in my written testimony, which compares normal, based on the 50-year average of real interest rates, to those that we have had since 2008. We multiply by the savings base, and to repeat the answer, it is $2.4 trillion. Now, there can be no doubt that taking $2.4 trillion from some people and giving it to other people is a political act. As a political act, it should be openly and clearly discussed with the elected Rep- VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 12 resentatives of the People who have the constitutional responsibility for the nature of money. In this context, it is an obvious fact that the Fed is just as bad at economic and financial forecasting as everybody else. It has no special insight into the future, and since it can’t see the future, it must be rely on theories. Dr. Kupiec said they are refining their thinking on theories. I say they keep changing the theories. Grown-up substantive discussions with the Congress about which theories the Fed is supplying, what the alternatives are, who the winners and losers may be, and what the implications for political economy and political finance are, just as the CHOICE Act suggests, would be a big step forward in the accountability of the Federal Reserve. And a key part of these discussions, I again suggest, should be a formal savers’ impact analysis. Thank you very much for the chance to share these views. [The prepared statement of Mr. Pollock can be found on page 93 of the appendix.] Chairman BARR. Thank you, Mr. Pollock, and your time has expired. And the Chair now recognizes himself for 5 minutes. Mr. Pollock, your testimony that Federal Reserve policies, and near zero interest rate policy since 2008 have deprived the American people savings to the tune of $2.4 trillion is certainly a depressing analysis of the failure of Fed policies post-recession. And I think even Dr. Dynan acknowledged that Fed policies have punished at least certain savers or certain Americans in the economy. But I want to focus on, for a moment, the comments from my colleague, Mr. Williams, who talked about interest on excess reserves and the policy of the Fed paying interest on excess reserves. As you know, the FOMC’s primary monetary policy tools are now interest on excess reserves and reverse repos, not open market operations. Interestingly, in 2013, former Fed Chairman Ben Bernanke said, ‘‘Banks are not going to lend out the reserves at a rate lower than they could earn at the Fed.’’ So essentially, in effect, Mr. Bernanke is admitting that the Fed is paying above market rates through interest on excess reserves (IOER). Do you agree with Chairman Bernanke that paying IOER is effectively paying banks to not deploy capital into the real economy? And if so, what are the consequences for Main Street Americans? We will start with Dr. Michel. Mr. MICHEL. Thank you. I do agree. You have a large pile of money sitting there, and anyone who has a large pile of money has choices in what to do with it. So if you have given them an abovemarket rate, they are going to probably go to that spot. Right? And that is all that is going on here. You have essentially diverted money from the real economy for a very small number of very large banks, and that does not help Main Street America. It does not help anybody but those large banks. Chairman BARR. Dr. Kupiec, in my discussions with the members of FOMC, both Governors and district bank presidents, some have defended Fed policies by arguing that IOER is not diverting VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 13 access to capital in the real economy in a material way. What would you say in response to that? Mr. KUPIEC. It is not just excess reserves. It is all bank reserves they pay interest on, which is problematic. It is problematic because without paying interest on excess reserves, the Federal fund rate, which is the rate that banks trade excess reserves at, would be zero. And it would be zero for the foreseeable future, because there are so many excess reserves that the Fed has generated through QE operations. So until excess reserves come down to a level far, far smaller than they are, the Fed has to do something to control the shortterm interest rate. And how it does that is it puts a floor over it by setting the IOER, which is now at 1 percent. It is not 25 basis points anymore. It is a real number. Those benefits do not pass on to depositors and banks, because banks have excess liquidity in deposits. They don’t have to pay to raise new deposits. So deposit rates haven’t risen, and they are unlikely to rise for a long time. This whole mechanism distorts the way the market works. The Federal funds market is not working the way it worked before the crisis, and the Fed is still targeting the Federal funds rate to set monetary policy. So there is kind of a disconnect here in how the whole system is operating. Chairman BARR. Mr. Pollock, in addition to the zero low interest rate policies punishing savers, do you concur with the argument that the Fed policy of paying interest on reserves, paying interest on excess reserves, is diverting capital away from the real economy? Mr. POLLOCK. I do, Mr. Chairman. I think we have to look at the classic theory of reserves, which is they were supposed to, by definition, be zero interest bearing and, therefore, banks tried to get out of holding them by lending out their money. That is the classic theory of the bank multiplier through high-powered money. Chairman Bernanke, in a brilliant political move, got the act changed to be able to pay interest rates on reserves. My interpretation is that is because the Fed itself wanted to act as the financial intermediary where it could draw the resources into itself and allocate the credit, which it did, to mortgages and to financing the government. Chairman BARR. Dr. Kupiec, really quickly, we know that the balance sheet is now $4.5 trillion. Do the American people have anything to be concerned about, with this oversized balance sheet? Mr. KUPIEC. The Fed has to decide what to do with its balance sheet. One of the reasons it has to control the Federal funds rate is that it doesn’t want to sell off Treasury securities. If that were to spook the long-term rate, then the long-term rates would jump, the stock market could risk calamity, and that kind of policy decision really isn’t in their playbook right now. So they are stuck looking at long-term interest rates. As long as they do that, they are going to have to pay banks to keep the interest rates up. Banks are going to be low to pass these benefits on to savers. And so I think it is a problem. Chairman BARR. My time has expired. VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 14 And the Chair now recognizes the distinguished ranking member, Congresswoman Moore, for 5 minutes. Ms. MOORE. And thank you so much, Mr. Chairman. Again, these are always extraordinary opportunities for the committee to hear from the best and brightest in the financial services industry, and I appreciate your appearance here today. I would like to direct my question to you, Dr. Dynan. This committee is often very critical of the Fed for its dual mandate, and there is a constant cry for us to eliminate the mandate that talks about increasing employment. So I am wondering if you can elaborate a little bit on the accommodative monetary policy of lowering those interest rates in order to avoid the employment versus the Fed doing nothing or doing something else. Ms. DYNAN. Thank you, Congresswoman Moore. With regard to the dual mandate, I think the two sides of the mandate really go hand in hand. The soft employment conditions that we have had in recent years are mirrored by disinflationary or deflationary forces, which contribute to the softer economy. In general, if you expect prices to fall in the future, you are going to defer spending today. So ignoring these forces is not the way to address an economy where a demand is falling short of where it should be. I should say, in this particular case, low inflation has been a particular problem, because we had a debt crisis where people were overleveraged. Traditionally, one way in which debt burdens are reduced is that inflation erodes them because they are usually defined in nominal terms. So I think the Fed’s efforts to both support employment, produce maximum employment, and to raise inflation to their targeted 2 percent— Ms. MOORE. Ms. Dynan, I am really specifically interested in the comments you made in your written testimony about the 86 consecutive months of private sector job growth, and is that a worthwhile tradeoff with regard to whatever interests, income may have been enjoyed by savings? Ms. DYNAN. As I noted in my testimony, you don’t want to minimize the hardship of anyone who has suffered as a result of lower interest income. But I will say that the Fed needs to act in the interest of the economy as a whole, and the effects of strong job creation have been really enormous for the American public as a whole. And as I explained in my testimony, really, that strong job growth benefits everyone in the economy. Ms. MOORE. Thank you so much. The name of this hearing talks about the suffering the seniors have felt with regard to monetary policy of the Fed. I am wondering if you can comment, or elaborate a little bit more on the fiduciary rule and the impact that may have on protecting seniors? You mentioned in your testimony that $17 billion has been lost as a result of—and the advice not being given appropriately to seniors. And you also mentioned provisions of the CHOICE Act that you think would materially impair the Fed’s ability to support a strong economy and stable inflation. Would you comment on that? VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 15 Ms. DYNAN. Yes. I worked on the fiduciary rule when I was in the Administration. I think it is very important to make sure that savers both large and small get a fair shake in financial markets. It is just common sense that we should require financial advice to be in the best interest of the saver. There are some very big opportunities for abuses, particularly when someone is coming out of a job and they have a 401(k), and they have been given advice under one standard in which the financial advisers need to adhere to stringent rules and, suddenly, they are being approached by people who want them to roll this money over to IRAs, and those people have conflicts of interests. And that is where, really, the $17 billion number comes from. So I think it is very important that we protect the fiduciary rule, and it is very important that we fight off attempts to weaken it, because I think it would harm savers. With regard to the CHOICE Act, as I mentioned in my testimony, the main concerns I have are about the provisions that require regular GAO audits of the Fed as well as the provision that ties monetary policy decisions closely to a pre-determined Taylor Rule. I think that both would undermine the Fed’s ability to support a strong economy. Ms. MOORE. Thank you so much. My time has expired. Chairman BARR. The gentlelady’s time has expired. The Chair now recognizes the Vice Chair of the subcommittee, Mr. Williams from Texas. Mr. WILLIAMS. Thank you, Mr. Chairman. I want to thank all of you for your testimony today. I appreciate that. I am a Main Street guy, a small business owner back in Texas. I go so far back, that I borrowed money at 20 percent interest. And I can tell you, today, it is tough on Main Street. Dr. Michel, on page 14 of your testimony, you talk about how the central bank’s policy stance was excessively tight at exactly the wrong time. You go on to say that the Fed’s policies prolonged the recession. You said, paying interest on excess reserves is bizarre. And can you go into more detail on why the 2008 policy was wrong then and why it is still wrong today? Mr. MICHEL. Sure. It was wrong then, because the whole idea behind expanding monetary policy during the crisis is that there would be more lending and more economic activity. The Fed acknowledged that they were using interest on excess reserves to prevent that money from getting out there. I’m not making this up. They have told us this. That doesn’t make any sense. If you have a crisis and you want to expand the economy, and you want to stop a downturn, you don’t do anything to stop that money from getting out there. You do everything you can to get it out there. So that was exactly the wrong time to do that. As far as now, what you have is, essentially, $2 trillion in excess reserves by the largest banks, and we have nothing to show for what we have done, but we have that money sitting there. And we are paying—the Fed projects that they will pay almost $30 billion of interest this year to those banks, and that will rise up to, under their projections, almost $50 billion, $50 billion by 2019. VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 16 That is not community banks getting that money. That is not Main Street Americans and average wage workers getting that money. That is money that is not being productively used. It is almost an overt bailout. And if it was the Treasury doling that money out, it would be an overt bailout. Mr. WILLIAMS. Let me follow through on that. You just said the Fed projects that it would pay $27 billion in interest on these excess reserves reaching nearly $50 billion by 2019, mostly going to large domestic and foreign banks. So now that the balance sheet has grown from the $900 billion pre-crisis to $4.5 trillion today, we see this money basically being diverted from the private sector to the Federal Government. So how does this hurt Main Street America, when someone wants to start a new business or get a loan? Because, frankly, when you combine these Fed policies with the heightened new regulatory standards under Dodd-Frank, I can see why we haven’t had sustained economic growth of 3 percent. Mr. MICHEL. No, this represents credit that has been allocated to someone outside of the productive sector of the economy. So it represents an opportunity lost. It represents money that they don’t have to start their new businesses or to finance their existing businesses. It is very hard to quantify the exact number of jobs and things like that, but what we know that it is a diversion from the real sector of the economy. Mr. WILLIAMS. The American Dream, and who gets hurt, at the end, is the consumer. Mr. Kupiec, as the Fed raises target interest rates, it must make increasingly large interest payments to banks, correct? Mr. KUPIEC. That is correct. Mr. WILLIAMS. So can you go into more depth quickly on how dealing with the excess reserves has the potential to increase our national debt? Mr. KUPIEC. Yes. As long as excess reserves are large and the Fed needs to raise short-term interest rates, the only way they can do it—they could do it in two ways. They could raise rates by selling off the Treasuries they have in their $4.5 trillion portfolio, but that would be such a change to financial markets that it would spook long-term rates in the stock market, and it would risk causing another financial problem there, another crisis. So they are kind of stuck with that and letting that roll off slowly, which means the reserves stay in the banking system. Banks are willing to keep the reserves in the system and not lend them out as long as they are being paid on that money. And the higher the interest the Fed wants to set the short-term Federal funds rate, the higher the rate it has to pay banks on their reserves. It is just as simple as that. So as they go through the cycle and raise rates, what is going to happen is they are going to pay banks more and more money, and it is going to impact the Federal Government deficit. Because the money that the Fed earns on its Treasury portfolio, it uses for operations. Part of the expense of the operations is now paying banks interest on their reserves. And so the Fed will give back to VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 17 the Treasury smaller and smaller surpluses until it would directly impact the Federal deficit. And as the Fed raises rates, if excess reserves don’t decline, it is going to have a bigger and bigger impact on the deficit. And we are going to be talking about it in this committee, but you are going to be talking about it in the Budget Committees too. It is going to be an issue. It is there. Mr. WILLIAMS. Thank you for your testimony. I yield back. Chairman BARR. The gentleman yields back. The Chair now recognizes the gentleman from Michigan, Mr. Kildee, for 5 minutes. Mr. KILDEE. Thank you, Mr. Chairman. And thanks for holding this hearing, and to the ranking member as well for helping to lead this. And thank you to the members of the panel. It is a very important discussion. Dr. Kupiec, I want to return to a point that you made in your opening testimony that had, I think, addressed in part what Ranking Member Moore was raising, and that is this issue of what is happening in the employment sector relating directly to the Fed’s dual mandate. And I think it was your testimony that while there has been positive job growth, most of the wage gains, in terms of household income, have been concentrated by people at the upper end of the economic spectrum. And I wonder if you might explore for a moment how Fed policy would impact that particular aspect of income distribution? Mr. KUPIEC. Yes. First of all, let me say, I don’t think any of the distributional effects of the monetary policy that have come about have ever been intended. I think the Fed did what it thought it had to do to spark a recovery. And I think the income distributional impacts are all unintended consequences. And again, they probably wouldn’t have shown up if monetary policy worked and sparked growth quickly. The problem is it didn’t work the way they thought it might. The recession was way worse, and these policies have continued on for many, many years now. And so they have had big and noticeable effects on income distribution. The wage gains come from the Fed’s own 2013 survey of consumer finance, which shows that the household income of the very highest deciles of the income distribution are the ones that receive the biggest gains. And through 2013, the middle of the distribution actually had 5 percent losses in household income. Mr. KILDEE. Yes. And I think we—obviously, the data speaks for itself, and we clearly would agree on that. I guess the question that I have is, because this discussion has to do specifically with Fed policy, to what extent is that phenomena attributable—and I ask the other panelists to maybe weigh in on this as well—to Fed policy as opposed to other drivers: globalization; technology; the relatively low rate of unionization in private sector employment— VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 18 Mr. KUPIEC. You can attribute it to lots of things, but what you need to add on top of that is it is not just what happened to wages. It is what happened to the—when the Fed started QE policies to actually bid up asset and home prices, and those benefits also go to the highest income earners, because they are the ones that have the houses and the financial assets. And, again, I don’t think any of this was designed to help the wealthy, but I am saying, if you look back over the last 9 years, it is pretty clear in the data that the wealthy did a lot better from these policies than the poor, or even the very middle-class, the vast majority. Mr. KILDEE. Maybe if the others could answer and then fold into that question about the extent to which low- and moderate-income households benefit from interest-based income or asset sources as opposed to other assets, other income sources? Dr. Dynan, if we could start with you? Ms. DYNAN. Thank you very much. I want to build on what Dr. Kupiec was saying. His analysis of the 2013 survey of consumer finances is correct, but it has been 4 years since that survey data was collected. If you look at more recent data on the distribution of wages, you can see that wage gains are now concentrated at the lower end of the distribution as would be expected given that we are at the tail end of an economic recovery. I also want to say, first of all, with regard to asset holdings, housing is a really important part of the nest egg of middle-class households. So they did, in fact, benefit tremendously from the $7 trillion of wealth, of housing wealth, that has been created since house prices hit their low point during the recession. I also want to say that recent research on the effects of expansionary monetary policy on the income distribution coming out of the Brookings Institution has shown that it does not raise inequality. That, in fact, the effects through job creation are really dominant and that offsets some of the other aspects that Dr. Kupiec was talking about. Mr. KUPIEC. I want to make a factual point. The U.S. Census Bureau says that the income distribution got more unequal in 2014, 2015, the last one out. According to the U.S. Census Bureau, there was no reversal in the income distribution. Ms. DYNAN. If I can just make a point on that point. Income inequality—the wealthier households were hit harder during the recession, because they held so many assets. Mr. KILDEE. My time has expired. Ms. DYNAN. So just as a rebound from that. Mr. KILDEE. I certainly appreciate any documentation you might supply to support your arguments. Thank you. Chairman BARR. The gentlemen’s time has expired. The Chair now recognizes the gentleman from North Carolina, Mr. Pittenger, for 5 minutes. Mr. PITTENGER. Thank you, Mr. Chairman. And I thank each of you for being with us today, for your great expert witness and counsel to us in Congress as we walk through the many ways that we can help address these issues. VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 19 We have been out of this recession now for the last 8 years. We certainly have not seen the rebound for households, for small businesses. They have clearly fallen short of their potential. Every other post-war recession has certainly seen a greater and faster rebound. I would like to take a look at why this has occurred, particularly related to compliance issues and regulations and how they have had an effect in these policies and impacted Main Street, impacted the access to capital. It impacted the access to the capability of growth. Dr. Michel, we will start with you and go down the row. Dr. MICHEL. Sure. Regulatory? On the regulatory side? Mr. PITTENGER. Yes, sir. Dr. MICHEL. If you look at the timing of Dodd-Frank and Basel III, it couldn’t have been any worse. You have an economy trying to recover and a banking sector trying to recover, and you impose stricter liquidity requirements, stricter capital requirements. You require them to hold onto more money as opposed to using it. There is only one way that is going to go when you look at the macro effect, and it is not up. Mr. PITTENGER. Yes, sir Dr. Kupiec, would you like to comment? Dr. KUPIEC. When you look at the data, and it is in my written testimony, as are the sources for the income and equality, there are cited there too, the data pretty clearly show that small business lending by banks is down. It is not up, it is down. It hadn’t recovered at all. Now, there is always an issue if whether that means that small businesses have no demand for loans, they just don’t want money anymore, or is it a supply issue. Are the banks constrained? And, quite frankly, economists, no matter how we go—we could be at Harvard, we could be at Brookings, we could be at Heritage, we can’t really figure out totally whether it is supply or demand. But I bet your hunch that regulation is playing a part is probably true. Was there a time when small businesses weren’t very optimistic and conditions weren’t good and they didn’t have a strong demand for money, that was probably true at stages of the cycle too. But you would think, in 9 years by now, small business lending at banks would have recovered and exceeded its levels prior to the crisis. And so that is a pretty good sign that something unhealthy is going on here in the financial system. Mr. PITTENGER. In North Carolina, since 2010, we have lost 50 percent of our banks. And just in the last 2 months, we have had 3 additional banks which have had to merge because of the compliance and regulatory requirements. And certainly that has a direct effect on the access to capital and credit in the market. Mr. Pollock, would you like to comment? Mr. POLLOCK. Thank you, Congressman. I think you are right about the regulatory burden. We know that expansions in regulatory bureaucracy always fall disproportionally hard on smaller organizations and on smaller banks. We mentioned who benefited in terms of labor. We know some labor segments it benefited: its examiners who check on compliance officers who check on external auditors who check on internal auditors, all of whom are checking on somebody who is actually doing some work. VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 20 In the meantime, in the Federal Reserve’s own balance sheet, we have a huge, very conscious, very intended by the Fed, huge resource allocation to take the funds and divert them to making house prices go up, securities prices go up, and to financing the government expenditures. That takes money away from the kinds of productive enterprises of which you are speaking. Mr. PITTENGER. Yes, sir. To that end, extrapolate some more on what the Fed could be doing in its role in all of this, how it could effect a positive change? Mr. POLLOCK. Congressman, in my opinion, the Fed has gotten itself in a tough situation with its big investment portfolios. It consciously set out to move the market up by creating huge market moving positions and now it wants to sell without putting the market down, and they can’t do it. So they have a dilemma. But in my judgment, what they ought to be doing now, 8 years after the end of the recession, 5 years after the bottom of housing, is trying to get back to actual functioning of a market economy in the financial sector with market-set interest rates. Mr. PITTENGER. Thank you. My time has expired. I appreciate your comments. Chairman BARR. The gentleman’s time has expired. And the Chair now recognizes the gentleman from California, Mr. Sherman, for 5 minutes. Mr. SHERMAN. Take a minute to deal with the supposed war on savers, the war on seniors. First, most Americans have a lot more debt than they have invested in interest. So for most Americans, low interest rates work out pretty well. Seniors get only get 10 percent of their income from interest income. They get a lot more in terms of wealth increases when the stock market goes up, when real housing and other real estate prices go up. So, in fact, the policies of the Fed have been beneficial to seniors, but there is a harkening for the good old days. Make American interest rates great again. I remember the good old days. You had 6 percent interest. If you had a million bucks in the bank, you were getting $60,000, you felt good, you weren’t invading your principal, and you were spending $60,000, we had a 5 percent inflation rate, you were invading your principal. But it was hidden. So the good old days basically were a way for people to feel good even while they were invading their principal by saying, well, you are only doing that in real terms. Nominally, you are keeping your nest egg intact. So the idea that taking out $60,000 in interest and seeing the value of your nest egg decline by $50,000 is somehow better than making $10,000 in income and then having to invade your nest egg by $40,000 or $50,000 in order to support your standard of living is psychologically true but not economically true. But what we have here—the mandate of the Fed is not to bring psychological benefits to savers. The mandate of the Fed is full employment and stable prices. Full employment means economic growth. And I would point out that, for example, the S&P Global found that, without—and this is just the third round of quantitative easing—1.9 million fewer jobs would have been created, implying an unemployment rate 1.3 percent higher. That is real economic growth just from that round. VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 21 But I am concerned about the interest on excess balances, because I don’t want to encourage excess balances. Why should banks put their money in the Fed when there are so many deserving business in the 30th Congressional district. Dr. Dynan, we are paying banks 11⁄4 percent absolutely risk free for excess reserves. What do we do to get them to loan that money to deserving businesses, in the 30 seconds I have left? Dr. DYNAN. Thank you. I appreciate your comments. And I will say I very much appreciate what you said at the beginning of your comments about perceptions. I think behavioral economists are looking into that and also about the fact that so many seniors do benefit directly from lower rates. On the excess reserves, I think there are good questions to be asking about why banks aren’t passing on those savings to the depositors. Mr. SHERMAN. Why don’t we tell them to we are not going to pay them interest on their excess balances, make them take that money and invest it in the private sector economy? Dr. DYNAN. I am not enough of an expert on the technical issues involving excess reserves and interest on excess reserves to be able to explain why the Fed needs— Mr. SHERMAN. I will go with the doctor sitting next to you on your right. Dr. KUPIEC. I can tell you exactly why. Because if they stop paying any interest on excess reserves, banks would pay absolutely nothing and raise their rates on their deposits, charge for deposits, because they would have to make it the income source. Everybody would take deposits out of banks and put them in money market mutual funds, and the banking system would collapse. They have to keep the reserves in the banking system, because if the rate outside the bank—if they didn’t pay anything at all, depositors would start getting charged through the roof to keep deposits at the banks. Banks are getting paid right now to hold people’s deposits— Mr. SHERMAN. You are saying the banks can’t find another place to make 11⁄4 percent on their money? Dr. MICHEL. Could I? I think Paul is— Mr. SHERMAN. Mr. Pollock, I was going to call on you earlier. Mr. POLLOCK. Thank you, Congressman. My answer is you take the interest on reserves to zero, where it always was, and thus you encourage loans. Now, why the Fed doesn’t want to do that is because that will generate the inflation set up by their big QE investments, which is what they are trying to avoid. Dr. DYNAN. If I may just add one more thing, I don’t think that there is evidence that those excess reserves being held at the Fed are actually holding back the banks from making loans. Chairman BARR. The gentlemen’s time has expired. The Chair recognizes the gentleman from Arkansas, Mr. Hill, for 5 minutes. Mr. HILL. Thank you, Mr. Chairman. I appreciate the opportunity to have this hearing. I want to echo some comments that, when it comes to the economic expansion, certainly in the 2nd Congressional district of Arkansas, which is Central Arkansas, Little Rock, there are only 4,400 more people employed since July of 2007—4,400 more people employed since July of 2007. VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 22 So the economic growth over the last 90-plus months has been not only subpart anemic, it has been certainly not shared by most of the country. In fact, many studies show that more than 50 percent of businesses and jobs are limited to just 20 counties in this country, all of which have an NFL franchise, except for Austin, Texas. So I call it kind of the ‘‘NFL effect.’’ And I agree with Dr. Michel that nonmonetary policy structural impediments have been a real drag on productivity, business formation, and labor-force, participation. And those nonmonetary policies, structural impediments include all the comments you made about the capital and liquidity rules that have been impacted by Dodd-Frank on top of the economic conditions that we have had. So I really think that the QE that we have talked so much about this morning, the multiple unconventional monetary policy that we have had, I don’t think the added GDP growth we have had, and the statistics have been thrown around here are measurably better. I think if we look with hindsight now, QE1 QE2, will not be proven to have been worth ballooning the balance sheet from $900 billion to $4.5 trillion. So with that, I am interested in the panelist’s views on the preferred course now to shrink this balance sheet. As we have risen rates—actually, 10-year rates have backed up a little bit in the marketplace, which makes me think because of the dollar and the strength of the American economy, there is a high demand for Treasuries in the world, which would make me think that market conditions are actually right for shrinking the balance sheet. And I am also concerned with the fact that we have seen the Fed become allocator of credit by buying 40 percent of the new issue mortgage-backed securities in this country. That is unheard of, has never been done before, and, I think, has terrible possibilities for GSE reform, the Federal budget deficit, the impact on credit markets. And I think there is—I read a story by one of the traders who was so shocked by the willy-nilly impact of buying mortgage-backed securities during the recovery period to the point that he wanted to apologize to taxpayers. TARP was not the biggest bailout. Maybe QE1 and QE2 were the biggest bailouts to Wall Street through particularly the mortgagebacked securities market. So Dr. Michel, what would you suggest is the right way to shrink this balance sheet, if you were advising Chair Yellen and Governor Powell and others? Dr. MICHEL. This may be where Paul and I differ a little bit. And I think that if you look at how QE was put into place, you have a roadmap for how to undo it. It was done in terms of the relative market—size to the relative overall market. It was done in a small fashion per month. And you remove interest on excess reserves. That does have an inflationary tendency. But as you sell assets, that has offsetting contractionary effect. So the thing to do is both of those at the same time, and do it in a slow, gradual manner. Pre-announce it and start auctioning them off. And I don’t know that the number is as important as the announcement and the timing and the slow graded sort of manner in which you do it. If you want to do it in exactly the amount that you purchased them, fine. Do it, $50-, $75 billion a month. But you have to make VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 23 the announcement, you have to start doing it slowly over time. And both at the same time have the offsetting interest on reserves being pared back so that you have the contractionary and expansionary effect going against each other so that don’t see the high inflation and that you dont’ see the large contraction. Mr. HILL. Do you think the Fed should limit its purchases in the future to Treasuries as opposed to other asset classes? Dr. MICHEL. Possibly. It depends on the framework that we were talking about. But in general, I think that you still have the risk of saying that what we are doing by Treasuries only is allocating credit to the government in a preferred position over everybody else. So there is a question there that I would say it depends. Mr. HILL. 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. Chairman, and thanks to the panel. You know, as I sit here, it is my second term in this place, and I listen to people who are brilliant, like you folks, come in and talk about the economy and numbers. And I wonder sometimes, have you ever been to Main Street? Because I will tell you what, the topic is about what the Fed has done to Main Street. And I think my colleague Mr. Williams was getting at it, because that is where he comes from. I think some people have been touching on it. But we have too many people who want to play with particular fact. And I don’t have your degrees. I think you could say I graduated from the School of Hard Knocks. I am somebody who actually was a consumer and still am a consumer. I think about the fact that my colleague French Hill just commented that we have some of the lowest employment participation in decades, that we are not producing the jobs that we should be producing. But everybody wants to say we got this incredible recovery. And it goes on and on. Dr. Michel, can you tell me one good thing the Federal Reserve has done in the last decade? Dr. MICHEL. In the last decade? Mr. EMMER. Well, maybe that is not fair. Let’s go back to 1913. Can you tell me one good thing they have done since 1913? Dr. MICHEL. I am sure they have done something right somewhere. Maybe if we focused on the great moderation period, Volcker’s second term, maybe up in there, something like that, I guess. That would be the highlight for me. Mr. EMMER. Here is another thing you have to help me with is that up here I keep hearing about how studies have shown you have to insulate financial or monetary decisions from the political process. And yet somewhere in our genius somebody in a previous Congress decided that we were going to add maximum employment to this price stability thing when, in fact—again, I am just a simple guy from the Midwest—my understanding is that price stability will drive maximum employment. Isn’t that correct, Dr. Kupiec? Dr. KUPIEC. That used to be the theory, but theories change all the time. But I think Congress created the Fed. Congress is in charge of the Fed. And I think the whole issue is Congress needs to have these kinds of discussions with the Fed and have the Fed explain clearly how they are going to unwind their portfolio. VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 24 Why paying interest on reserves is a good idea, not a bad idea, you are asking us, but this is the kind of thing that the Fed should be really having a discussion about. That is what is missing. Mr. EMMER. It is interesting. Again, I’m just a simple guy. We have gone from an economy that is based on wealth creation to an economy that is based on debt leverage. So an economy based on wealth creation is for everybody. Even the little guy or gal who goes down to the community bank or the credit union and gets a loan to start the next great idea. We are not starting new businesses like we used to. And yet I come here and I hear it is great. They are doing wonderful things. In the time I have left, there is something that I want to talk to Mr. Pollock about, because you hit on it, and I think the chairman and/or his staff probably knew when you submitted your written testimony that this would get me all fired up. I don’t know any other way to put it other than theft. But this 2 percent annual inflation rate, this target, Mr. Pollock, that is purely arbitrary, correct? Mr. POLLOCK. It is Congressman, and it is a pure theory. Mr. EMMER. And call it a hidden tax. Call it what you want. But you are stealing from my parents. You are stealing from all the Boomers who have saved and planned. And then I hear testimony that, you know what, people haven’t saved enough. Where is the incentive? What are we doing? Mr. POLLOCK. Congressman, you are absolutely right. And I will add that the Federal Reserve Act, as amended in 1977 with the socalled dual mandate, doesn’t talk about steady inflation. It talks about price stability. The Fed itself made up the idea that it was going to redefine price stability to mean perpetual inflation. Mr. EMMER. And isn’t that somewhat subject to political pressure? Mr. POLLOCK. Absolutely. That is why I said in my testimony, if I may repeat myself, that the nature of money is a political decision to be made by the Congress. Mr. EMMER. And I appreciate you repeating yourself, because it is interesting to me that this is not more widely discussed outside of Washington, D.C., that the average person who is out there working hard, trying to play by the rules saving for their retirement, they have these insidious policies that are literally stealing the money from them while they are sleeping. And I think more people need to talk about it. And, frankly, the Administration, I think, needs to take a bigger a role in this. Dr. KUPIEC. Some of the Fed Governors or presidents of the banks are arguing they need a higher inflation target to meet their high employment price stability bill. Mr. EMMER. And some are also arguing we should make banks utilities which would completely frustrate the process. Thank you for your patience, Mr. Chairman. Chairman BARR. I wish the gentleman’s time had not expired, but it has expired. And now we move to the gentleman from Ohio, Mr. Davidson. Mr. DAVIDSON. Thank you, Mr. Chairman. Thank you to our panel. I really appreciate your written testimony and what you have shared with us here. It’s very tempting to pick right up where VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 25 Mr. Emmer left off, but I do have a couple of other questions, so maybe we can get back to that. Dr. Michel, your testimony highlights a sense of humility and perspective about what is the proper scope of monetary policy. And you also highlighted—we didn’t really see an incredibly good track record for the Fed. If you look at the decision to have the Federal Reserve in the system that we have today, is it a structural problem or is it a strategic problem? Dr. MICHEL. I think it is a structural problem in the sense that we have way too much faith in our ability to sort of turn dials on the economy through monetary policy. And I think that the evidence bears out that this just doesn’t work when we had almost exactly 100 years to experiment with this type of thing. And recessions have not gotten shorter, recoveries have not gotten quicker, as we have just talked about what happens with inflation. So the idea—I will go quickly—that you can have this trade off between inflation and employment, that was an idea that started and I believe came to its peak in the 1960s. And I thought it was dead. Somehow it keeps coming back. So, I don’t think that there should be an employment mandate anywhere in there with the Fed. And I think they need to be more accountable for what they are doing, and in that sense it is a structural problem for sure. So maybe that answers your question. Yes, I think it is a structural issue in terms of, we have not properly defined what they should be doing and held them to account. Mr. DAVIDSON. We have a lot of debate about this strategy or that strategy. But in a way, we have put in place a system. And to pick up where Dr. Pollock, you left off, a system that has a structure in place that preserves the status quo of inflationary which deflates the value of savings. It destroys the value of our money. If the purpose of money is to be a store of value, everything about the current structure erodes it. And I might add that we are not doing ourselves any favors with fiscal policy. And if you could comment about the intersection, Dr. Kupiec, if you could talk about the intersection of fiscal policy and the fact that we borrow so much and the Fed’s role in that? Dr. KUPIEC. If you look at what has happened since the financial crisis, the whole idea of stimulative monetary policy is to get consumers to borrow and spend more and increase growth that way, and businesses to invest and spend more and increase growth that way, borrow and spend. But, really, who borrowed since the crisis is the Federal Government. And there are some nice graphs in the back of my written testimony which show that the government borrowings are up almost 300 percent since the crisis, while the private sector level of borrowing is nowhere near that. And some parts of it it are pretty flat. So, the whole monetary expansion has very much benefited the government in terms of keeping the cost of government borrowing exceptionally low for an exceptionally long period of time, and the Fed owns a lot of that. And without a doubt, that has been one of the big impacts. And now, as we move into a period where we want to raise rates, it is going to have an impact on the deficit in two ways. One, because we are going to have to pay banks more to keep these excess reserves. VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 26 And, two, if they were to sell off their bond portfolio and raise long-term interest rates, the Federal Government would have to refund those bonds, the ones that mature at much higher interest rates. And that is going to cause you guys headaches in the Budget Committee hearings. So that is kind of where we are right now, that these things are going to impact—they are going to feed back on the budget, and it is going to happen. Mr. DAVIDSON. Thank you. And I will close with Dr. Pollock, just a question. But when we talk about this, what is the impact on the household? What is the impact on Main Street? Destroying the store of value in our money is a huge problem. And our fiscal path of bankrupting our country is a big problem. Mr. POLLOCK. Congressman, I agree with your thoughts here. The longest-serving Federal Reserve Chairman, William McChesney Martin, called inflation, ‘‘a thief in the night.’’ The Fed has changed its ideas since then. And if I could—could I have 20 seconds, Mr. Chairman? Chairman BARR. Well, the gentleman’s time has expired. Mr. POLLOCK. All right. I don’t get 20 seconds, Congressman. I will tell you later. Chairman BARR. We will have an opportunity for a second round. Mr. DAVIDSON. My time has expired. I yield back. Chairman BARR. I am sure you will have an opportunity, Mr. Pollock. And now the Chair recognizes the gentleman from Indiana, Mr. Hollingsworth. Mr. HOLLINGSWORTH. Mr. Pollock, I will give you 20 seconds. Mr. POLLOCK. Thank you very much. In ancient Greece, Dionysius, the tyrant of Syracuse, couldn’t pay his debt. So he expropriated all the silver coins from his citizens on pain of death and took the One Drachma coins and restamped them two Drachmas and gave them back to pay off the debt—thereby setting the pattern for inflation by governments in all future times. Mr. HOLLINGSWORTH. Before we delve into a couple of questions, I wanted to reiterate something my colleagues have said. I found the use of the word ‘‘strong’’ in recovery almost an insult. And I think Hoosiers across the district would feel the same way back home. Certainly, this recovery hasn’t been strong. And to say it has been strong relative to the nadir of the recession is a misnomer. And to say it has been strong relative to other countries is just measuring who is the tallest dwarf in the room rather than a measure of real strength in the economy. Dr. Kupiec, in reading your testimony, I really appreciated that you walked through kind of a lifetime consumption model and how lowering interest rates theoretically should move savers—or move down the preference line between saving and consumption and create more consumption. But have we really seen before what happens when interest rates are very low for a very long period of time and, rather, instead of allowing for the tradeoff consumption and saving, whether we are permanently altering the preferences themselves and expectations for rates in the future. Dr. KUPIEC. Congressman, that is a great question, and the answer is, ‘‘no.’’ Back in December, we had an event at AEI where we had a noted historian, Dick Sylla, come in, who has actually written the book on the history of interest rates all the way back VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 27 to the Roman times. And in Dick’s book, he did remark that he had never seen in history anywhere a period where interest rates were 0 or negative for such a long period. So it is extraordinary, and it has a number of implications, because if you really think about it, the financial services industry is built on a model where interest rates are positive. They make investments at some higher rate to provide a service to consumers and take some spread. When interest rates get to 0 or below, there is no spread anymore. So things like life insurance—all those things become problematic. They either have to directly charge more for it. And so this is an experiment that has far-reaching implications for the whole financial sector in how we move forward. Mr. HOLLINGSWORTH. I think, if I could speak anecdotally, certainly millennials don’t know what it is like to see interest rates at 7, 8, 9, 6, 5 percent. They think of mortgages. And when they hear 31⁄2 percent, they think that is outrageously high. That must be usury, right? And the second question I really wanted to talk about, and it has been touched on before, but have we really started to see the cost of unwinding this balance sheet? Because one of the things that I really worry about is not just, as French Hill said, the mechanics, but also the crowding out of investment. As we start to unwind the investment in those Treasuries, it has to come from somewhere. It is going to come from the private sector, maybe some of it coming from abroad. But it is not going to be invested in the private sector. And I worry that we have not begun to see the significant costs. We have seen very little benefit. Now we are going to start to see the significant cost in the future, and I wonder whether Dr. Michel might touch on that and Dr. Kupiec, and Mr. Pollock as well? Dr. KUPIEC. I would say I agree with you. I think we are treading water at this point in time. And the Fed is starting slowly to try to engineer the old way they used to raise rates, the Federal funds rate, and they have to do it in a different mechanism. They don’t want to sell off their long-term Treasury portfolio. They have not figured out how to do that yet, because it would spook, I think, longer-term rates if they did it in a big way. And if they announced a long-term program to sell it off, if it was slow enough that the economy could absorb it, maybe. But I think they are treading water, hoping there is no inflation now, things don’t look so bad. But I really don’t think the whole process of unwinding all this has been thought through. And I don’t think the costs have actually shown up yet. Mr. HOLLINGSWORTH. I will go to Mr. Pollock, because I want to ask Dr. Michel a question at the very end. Go ahead? Mr. POLLOCK. Congressman, on the 0 interest rate question, I think the answer is long periods of negative real rates are a narcotic for financial markets, and it usually doesn’t end well. You are absolutely right on the Fed’s balance sheet. We are not seeing the cost on the unwinding, because they are not unwinding. They are still buying every month. Mr. HOLLINGSWORTH. Right. And Dr. Michel, the last thing I want to talk about is, is it universally agreed upon by economists that inflation is a positive thing? Deflation exists, right? If price VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 28 levels were the same and productivity were increasing, we would see deflation, right? Dr. MICHEL. Right. It is not universally agreed upon. So it is not universally agreed upon that it is a good thing. It is not universally agreed upon in that group, what rate it should be. And both of the those groups ignore something that we knew a very long time ago and somehow or another, as a profession, seemed to have forgotten, which is that you need less less money if the economy is more productive, not more. So you should have—there is a difference between a massive deflation in asset prices and a good deflation as the economy grows. We shouldn’t be stamping that one out. Mr. HOLLINGSWORTH. Perfect. Thank you so much. I yield back, Mr. Chairman. Chairman BARR. The gentleman’s time has expired. The Chair recognizes the gentlelady from Utah, Mrs. Love. Mrs. LOVE. Thank you so much for being here today. I just have a couple of questions. Dr. Michel, you state in your testimony that we should hold the Fed accountable for maintaining a stable inflation rate where the target rate is conditional on the rate of productivity growth so that inflation rises above its long-run rate only when there are productivity setbacks and it falls below its long-run rate only when there are exceptional productivity gains. Would you expand on that for me? Dr. MICHEL. Sure. Think of something like, stable inflation under the Fed’s current interpretation of it means you should have constant inflation all the time at 2 percent. That is the idea. And, of course, we don’t really get 2 percent over the long-term. We get more like 4 percent. But leaving that aside, think of something like a supply shock that we had, say, in the 1970’s with an oil embargo. What happens is you have less oil, so everybody is hurting, and prices go up, and you see inflation across-the-board. It makes absolutely no sense to try to stick to an inflation target by taking more money out of the economy and, therefore, killing the people who don’t have the fuel they need, right. Mrs. LOVE. Right. Dr. MICHEL. But that is what this constant low, ‘‘positive inflation’’ does in that environment. So you cannot let the Fed interpret price stability the way that they have, otherwise you get into that problem. And it is the same on the other side when you have productivity and prices should be declining. Mrs. LOVE. Okay. Mr. Pollock, you say in your testimony that the Fed is just as bad as everyone else at economic and financial forecasting, despite having an army of Ph.D. economists who can run computer models as complicated as they choose. So why do you think the Fed is so bad at forecasting? And I want to get back to that, because you have a brilliant quote in your testimony that I want to get back to. But why do you think the Fed is so bad at forecasting? Mr. POLLOCK. Thank you very much for liking my quote, Congresswoman. It is bad at forecasting because forecasting is about the financial and economic future, which is fundamentally uncertain. It is not like a physicist calculating the path of a planet using Newton’s laws. This is about forecasting the interacting behavior, interacting strategies of governments, investors, consumers, entre- VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 29 preneurs. And no one, including the Fed, knows what is going to happen. And that is why they should not pretend to be philosopherkings who know this, and why they should not be granted independence from the elected Representatives of the People. Mrs. LOVE. Okay. So you have said that in our current national policy it is not one of savings and loans but one of loan and loan. And I want to know what that means for the average American. In other words, what does that mean for the young person who is still dealing with the high cost of education and paying off their student loan debts or the trucker who is trying to make ends meet and he is realizing that the cost of healthcare has continued to go up? What does that mean for the single mother who is just busting her chops every day to provide for her children? Mr. POLLOCK. Congresswoman, without savings, there are no loans, in the end, or any investment or any growth, in the long run. Savings should be encouraged, and we have forgotten how to do that. Now, in certain circumstances, of course, it is more difficult to save than others. I mentioned in my testimony the old theory of the savings and loans, I am talking in the 1920s and 1930s, which were focused on low-income people and inducing them to save; it was a wonderful and right idea, in order to get control of their lives. It is harder sometimes than others. But I used to have the historical savings contracts from the savings and loan I ran in which people promised to save $2 a week, $1 a week, $5 a week. It was to establish the pattern and practice of savings which will stand you in good stead over time. Mrs. LOVE. It is really interesting because as I speak to people in my district, I ask them if it is a lot easier or a lot more difficult to save for the future. And over and over and over again they tell me that it is absolutely impossible to have any savings, because every time they turn around and save something, there is something else that is coming out of it, and they can’t keep up. I know my time has expired. But I just want to say this. You said that the notion of philosopher-kings is distinctly contradictory to the genius of the American constitutional design. That is a great quote. I yield back. Mr. POLLOCK. Thank you very much. Chairman BARR. Thank you. And the gentlelady’s time has expired. The Chair now recognizes the chairman of our Capital Markets Subcommittee, the gentleman from Michigan, Mr. Huizenga. Mr. HUIZENGA. Thank you, Mr. Chairman. And I am attempting to go back into Plato’s Republic on this, again, as a Brown’s child, approaching how we are going to deal with what lies in front of us. There are so many different directions to go. And I think I am going to need to lay out a couple of things. Something that I am very concerned about, and I know other members on this committee are, on both sides of the aisle, is income disparity. You look at where we are as a Nation. It is a real issue. And we have pockets of economic activity. My home county has a 21⁄2 percent unemployment rate. Within my district, I house that county. I also house the poorest county in the State of Michigan, like one of the top 50 counties in the Nation when it comes to poverty. I house, just literally 25 miles north of where I live, the county that butts up to VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 30 this county with 21⁄2 percent unemployment has double that, triple that. Quadruple that in the African-American community. We have a significant pocket of minorities that are there. We are seeing older workforce participation and, really, frankly, underemployment among youth. So the workforce is getting older. Why? Because they are having to work longer. And this notion that seniors are doing great because the stock market’s doing great, I just do not buy it. We are seeing IPOs at modern era lows. We are seeing a select few groups of people, whether they are Wall Street folks, whether they are qualified investors, folks who have a million dollars in value or net incomes of $250,000. They are doing great. It is the other folks. It is the folks that we represent who are struggling, who are really kind of bumping along. And as we look, we have seen the other side others have thrown up a chart about. Loan activity is up. Oh, but if you dive into it, industrial loan activity is up. Small business loans are down. And so we are losing the engine of economic activity on that grassroots micro basis for this larger scheme that has been painted out there. And it seems to me for—why would we keep trying this, certainly, at a minimum, underperforming system, if not failing system of stimulus, that is not reaching the people that it is intended to reach? Why do we keep doing it? Read Keynes. You all have, right? You probably are not on this committee if you have not read John Maynard Keynes at some point or another. He talks about short stimulus. Not 10 years. Not bumping up on the 10 years of this. And if monetary policy is not doing what it can to facilitate investments wherever they show this promise, lone American households and American businesses and American entrepreneurs just keep bumping up against this wall as they are trying to fulfill their potential. That really, I think, ought to be concerning to all of us. And how do we unwind—getting back to my colleague from Arkansas—this? Because I am concerned. Just yesterday we had a phenomenal hearing. Two panels on market structure and where the market is going. And ultimately, it doesn’t matter if we are not allowing the system to work for those who need it the most, which is our constituents, hardworking taxpayers who have felt like they have had nothing but headwinds coming at them from their own government with a monetary policy and a whole raft of other things, like tax policy and regulatory policy. And I am just very concerned about that. And I don’t know, Dr. Kupiec, if you care to comment quickly? Dr. KUPIEC. I think your concerns are well-founded. And I would say first that monetary policy is a blunt instrument. I don’t think the Fed ever had the intention of causing the income redistribution that I think it has caused. I think it tried to do what it thought was right to resuscitate growth. And it had these unintended consequences. And at this point, I am not sure we all have answers on how you get out of this in the long run. I think there are going to be costs involved. But I think the point is— Mr. HUIZENGA. As Keynes said, we are dead in the long run anyway, right? Dr. KUPIEC. Well, no. I didn’t say that exactly. Mr. HUIZENGA. No. No. I know you didn’t. Keynes did. VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 31 Dr. KUPIEC. Yes, he did. But I think the whole point is to encourage and not discourage better dialogue with the Fed on all these other issues that aren’t just the top number GDP numbers, inflation numbers that tend to hide all that is going on underneath. Mr. HUIZENGA. Thank you. Chairman BARR. The gentleman’s time has expired, and the Members have requested a second round of questioning for the witnesses. So with your indulgence, we will proceed with that second round. And the Chair recognizes himself now for an additional 5 minutes. I wanted to follow up on the question related to the oversized balance sheet. Mr. Hollingsworth asked a series of very good questions about that. And he asked about the cost of unwinding and the potential of crowding out private investment. What other risks does an oversized balance sheet pose to Main Street America? What are those risks? And is there any way that the Fed can, as it unwinds, avoid those risks? We will just go down the line here. Dr. Michel? Dr. MICHEL. One of the risks is that you are paying—literally paying these people on these assets. So if you look at what is going on with interest and excess reserves on the extra balances, under the Fed’s projections, you are going to be seeing—taxpayers, rather, are going to be seeing that they are going to be paying large banks $50 billion a year. That is a direct cost to people, and it is going to be a political nightmare when you have the Fed set up to continue paying these banks literally billions of dollars a year. I will concede that we don’t know exactly what is going to happen here. But I think when we talk about the recovery, the anemic recovery, you have to put it in context of, oh, and then there is some more to come, because we haven’t unwound all this stuff. Chairman BARR. And, Dr. Kupiec, as you answer this question, please amplify your testimony when you basically described a dilemma between, on the one hand, a need to normalize, and on the other hand, the economic downside of the Fed’s only policy tool that it is using right now of increasing interest on excess reserves. Dr. KUPIEC. That is the dilemma. They have this problem, in part—not in part, in total, because of the QE. And they bought enormous—billions of dollars—well trillions, actually, in assets, right, and they turned those into reserves. And for the bank to make that tradeoff, they paid the bank on reserves to keep reserves in the Fed. And now their only policy tool—they have two policy tools. They could start selling their Treasuries. If they sold their Treasuries, the market would react in a fairly big way, I think. They have such a large part of the Treasury in GSC market that long-run rates would react to any kind of unwinding announcement or something like that. And they don’t want long-run rates to rise. We haven’t recovered. We need a recovery still. And so now they are sticking with their old instrument to keep— to tighten or to look—do whatever they are doing which raising the Federal funds rate, and it is not clear that that works the same way it used to work with all these excess reserves in the banking system. But that is the only other technique they have. Now, they could do repo operations and not pay on bank reserves, but then that would—repos, mutual funds can participate in, and that would move money out of the banking system into the mutual fund sys- VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 32 tem. And the Federal Reserve wouldn’t want to do that. So they wouldn’t want to do anything that disadvantaged the banking system relative to what they would call the so-called shadow banking system. So they are kind of stuck. If short-term market rates were to change anywhere else in the economy, they are going to have to pay banks to keep the money in the banking system and not migrate out. So I am sorry this—I know this sounds confusing, and I don’t have an answer to the question. But it is sort of a quandary we have gotten ourselves into that— Chairman BARR. My time is about ready to expire. So I have another question for Mr. Pollock, really quickly. Obviously, the loose monetary policy that has been pursued by the Fed was supposed so boost asset prices. The idea was to goose these asset prices to make people feel wealthier, and the synthetic wealth was, in turn, supposed to cause households to spend more and, therefore, jump start the economy. That is, in effect, Dr. Dynan’s testimony. Clearly, the results haven’t been as projected. In the previous Administration, we didn’t see a single year of GDP growth of 3 percent or greater. That is the first time that has happened since the Administration of Herbert Hoover. So clearly, the Fed’s policies have not produced the result that they predicted. Can you respond to that analysis? Mr. POLLOCK. Mr. Chairman, it has produced the result of goosing asset prices, just as you say. So we have had a huge boom in house prices, stock prices, and bond prices. The problem with an eternal monetary policy of that sort, which we could better call a market distortion, is those prices will not go up forever. Let’s talk about house prices for just a second. High house prices may feel good if you own a house. It is terrible if you are a new family trying to buy a house. And when the overinflated house prices then go down, everybody will feel terrible. Chairman BARR. My time has expired, and the Chair recognizes the gentleman from California, Mr. Sherman. Mr. SHERMAN. Thank you, Mr. Chairman. I am glad you are doing a second round, but no Democrat can stay here past another 5 minutes. So I hope the second round is as nonpartisan as possible. We won’t be here to inject our words of wisdom should that not be the case. The policies we have had over the last 5 or 7 years have given us the longest if not the fastest recovery. House prices for the buyer are not the stated price. They are the mortgage payment that comes with that house. Can you afford the mortgage payment? So housing prices are not at an all-time high until we get normal interest rates, and then they will be. And then I think, as Mr. Pollock points out, some people are going to get hurt. The gentleman from Michigan talks about the need to lend money to small business. We have a lot of money in capital. And it is all going to T bonds and highly safe instruments. And that is perhaps the responsibility of this committee, because we have this very efficient banking system that is told raise all this money, and it is insured by the Federal Government. And then we are telling them only lend it at prime, maybe prime plus 1, prime plus 2. The businesses in our district and your district that you want to get the loan, you wouldn’t loan the money at prime plus 1. The pizzeria in VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 33 my district has a chance of going bankrupt. That is why we need prime plus 4, prime plus 5 loans. But we have a very efficient system that takes all the money and prohibits them from putting it in prime plus 5 loans. And instead, that money has to be given— it has to be loaned to a small business or a private equity or a venture capital. And then maybe it can get to a business that is doing something that is risky or different or small. We have a low—great target. It ought to be higher. In my first statement, I pointed out the psychological benefit for seniors of living in a world with a 6 percent interest rate and a 5 percent inflation rate. Economists can tell them that they are eating into their capital. They don’t think they are, and the mistake that they are making is wonderful. It makes them feel better. And that is very helpful. Also, we see that rents, salaries, and other things stick. But in inflation, you don’t have to lower things. You can just keep them the way they are. And that is your method of lowering them. So it actually adds some ability to move prices up or down as the economy calls for. But the main reason we should have lower interest rates, which will lead to somewhat higher inflation rate, is we need the labor shortage that will give us rapidly expanding wages. IPOs are down. I don’t know whether that is because our system for initial public offerings is worse or a private equity system is better. But everything we can do to make initial public offerings work better, we ought to do in this committee. One of the witnesses said savings should be encouraged at all times. I disagree. You can’t have too much savings, too little consumption. If you have that, then you have no—then demand is flat. You have unused capital resources. Nobody wants to borrow to build those capital resources. But the phrase savings should always be encouraged at least meets a particular political plan, which is lower taxes on the savers, those people who get a substantial portion of their income from savings, when the vast majority of Americans can’t get a—don’t have that savings. So it is only a small segment of the economy that gets a substantial portion of their income from savings. I would also point out that the after-tax inflation adjusted return in our current economy is 0 for those who don’t want to take a credit risk. The yield on tips is a little bit over the inflation rate. But then you pay taxes not only on the part that is a little bit on the inflation rate but also the part that just reimburses you for inflation. We have a lot of savings as evidenced by the fact that nobody is—that saver’s reward after tax is roughly 0, and people are still willing to save. We ought to, perhaps, provide an inflation justified APR to lenders and to depositors. The information we calculate now is very exact and very complicated and very wrong in an economy in which there is inflation. Democracy versus bureaucracy, there is a lot of support in the elites in our society, for philosophers kings and Federal Reserve members and others to make the important decisions. And I will point out to this committee, if that bridge in Alaska had been a bureaucrat’s decision, nobody here would have ever heard of it. The media focuses on attacks on decisions made by elected officials. And I am going to have to ask for a written response to this question, and that is how much capital gain or loss has the Fed incurred through QE? We know they VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 34 have made a lot of money on interest rate spread. But I assume if you bought long-term bonds in 2010 and 2011, you lost some money. So, Mr. Pollock, perhaps—is there just a number that you have, or should you answer for the record? Mr. POLLOCK. I have written on that recently, Congressman. I will be glad to send you my article on the interest rate risk of the Fed, which I describe as the biggest savings and loan in the world. Chairman BARR. The gentleman’s time has expired. Thank you, Mr. Sherman. And now the Chair recognizes the gentleman from Arkansas again, Mr. Hill. Mr. HILL. Thank you, Mr. Chairman. So continuing our discussion, I was looking at the value of QE1 and QE2 and PIMCO, for example, estimated that for spending $4 trillion, we got $40 billion in additional economic output, not a very good tradeoff. And I can remember being in banking back during QE1 and QE2 wondering what are we getting for this, as a banker, just as a private sector participant, when we—the first thing you learn when you have a losing position in an investment portfolio or a losing bond loan— a loan in a loan portfolio is, when in a hole, stop digging. And the Fed double-downed on digging as it went beyond QE1, QE2. So now that we are here and we are talking about the impact on Main Street, I would say that, to your comment, Mr. Pollock, that, with a 6-year duration at the Fed now, you have set up, not a savings and loan, but one of the biggest hedge funds in the world. We have monetized the debt of the United States, we have inflated speculatively stock prices. We, in turn, with public policy, have moved people into index funds instead of making individual decisions about the individual quality of equities. And we have 0 interest rates and yet we have extended car lending from—when I started in banking, it was a 3-year loan. Now it is 72 months—at these low rates. And 40 percent of new cars are in a lease program, which is even higher than you can borrow at the bank and you don’t own anything at the end of the term. We have done commercial real estate lending, basically underwritten to a 125 debt service coverage ratio at 3 or 4 percent. And if rates normalize, think of the equity contribution those investors are going to have to make to maintain that 125 debt service covered ratio. We have hidden the budget deficit, the real impact on the budget deficient by the Fed’s actions, and that will get worse as rates go up. So the impact on Main Street of the Fed’s actions of the last decade are going to be immense. And they are essentially, in my view, all negative. And any benefit that occurred from them is modest. As evidenced by PIMCO’s suggestion that, for $4 trillion, we got $40 billion of extra economic output. So when we try to reform the GSCs, Mr. Pollock, could you reflect on—since you have written on this subject, we have a 6-year duration, we own 40 percent of the government-issued, mortgage-backed securities, how is that going to impact our ability to reform the broken secondary mortgage market in this country, the Federal Government owning 40 percent of those securities? Mr. POLLOCK. Congressman, I think that is an excellent point, and it gets in the way of reform, since we have the Federal Reserve owning the biggest position in Fannie and Freddie’s mortgagebacked securities. We have the U.S. Treasury owning most of the VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 35 equity of Fannie and Freddie. And it gives us what I call the ‘‘government combine’’ in the housing finance business. My subtitle is: who is the socialist? Between Fannie Mae, Freddie Mac, and the Federal Reserve, and the U.S. Treasury, there is a very tight and complex financial set of intercommitments and relationships, and it gets in the way of reform. But in my opinion, that shouldn’t stop us from reforming housing finance and Fannie and Freddie toward extracting the government from being the dominant and distortionary mortgage finance player and moving toward more private, more competitive market. Mr. HILL. I appreciate that. Dr. Kupiec, I think Governor Powell did lay out a very good longterm speech not long ago about the unwinding and set out some expectations and, really, in the market rates have improved, even anticipating this shrinkage. So I do think, to Dr. Michel’s point, that if the Fed outlines a plan, that maybe the market would be more resilient than we think, and we should get on with it. But Chair Yellen said something that she said that she felt that the balance sheet reduction should be delayed until we get the Fed funds rate up to a number that she would not say. I would be interested in your view. Is there a range of Fed funds rate that would make it better for shrinking the balance sheet more directly? Mr. KUPIEC. I wonder why the Fed funds rate means anything if it is the rate that the Fed pays on bank deposits, if that is the floor. So I don’t know what it reflects. It is an administered rate. So I am not entirely sure I understand why—they could set it at whatever rate they want it to tomorrow. Would the economy change any differently, immediately? I don’t think so. Mr. HILL. Thank you very much. I yield back. Chairman BARR. The gentleman’s time has expired. The Chair recognizes the gentleman from Texas, Mr. Williams. Mr. WILLIAMS. Thank you, Mr. Chairman. And with all due respect to my colleague from Arkansas, Mr. Hill, we have gone from 72 months to 84 months. So does anybody want to buy a car? Dr. Michel, as Mr. Sherman suggested, if we stopped paying IOERs, would we be able to return to the Fed fund’s policy rate, do you think? Mr. MICHEL. Oh, if we do? Mr. WILLIAMS. Yes. Mr. MICHEL. I would say yes at some point. I don’t know how quickly this happens. I don’t know how quickly they can fix it. I think you have to unwind the balance sheet and stop the interest on the excess reserve program and the overnight repurchase program, which is effectively very close to the same thing. I think all of those things have to happen to get back to where you have a competitive—or anything like a competitive Federal funds rate market. So, yes. I just don’t know how quickly you can do that. And I don’t know that they do either. If you go back and look at what happened, initially, when they said they were going to pay interest VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 36 on excess reserves, they said we are going to set this rate so that it is a floor on the Fed funds rate, as Paul mentioned. And what happened? It went straight past the floor. And then they said, oh, no, it is going to be a ceiling on the Federal funds rate, and now we are going to have a Federal funds target range instead of just a target. So they have lost control of it because of what they did. And I don’t think they fully understand or anybody fully understands exactly how and when that could be put back together. Mr. WILLIAMS. Mr. Pollock, would you have a response to that? Mr. POLLOCK. I think that if you could get away from the interest on reserves, it would help get back to the previous system of Fed funds targeting. But we have to remember, when it comes to the Fed setting interest rates, that just like the Fed doesn’t know the future, the Fed doesn’t know what the right interest rate is either, because no one knows that. That is why you have a market. Mr. WILLIAMS. I remember when 16 percent was a good rate, so— Mr. Chairman, I yield my time back. Chairman BARR. The gentleman yields back. The Chair recognizes the gentleman from Minnesota, Mr. Emmer. Mr. EMMER. Thank you, Mr. Chairman. And thanks for submitting to another round of questions. I want to talk about reform, believe it or not, if it is possible. Obviously, I am not a fan of what the Federal Reserve has been doing, but I do agree with Dr. Kupiec. I think well-intentioned people are trying to do the right thing. You talked about procedural change in your initial testimony after the Humphrey-Hawkins, once you get the written testimony, have experts review it. I am just wondering if any of your colleagues—and, again, put it in this context: I do come from Main Street. And I think one or more of you in your testimony said earlier, there is a breakdown between those who are inside the Fed or actively working with the Fed and those who are on Main Street wondering what in God’s name are they doing, and why can’t we see what they are doing, and there must be something going on that isn’t quite right, because we aren’t feeling this great recovery that everybody tells us is there or at least it is hollow. Are there other reforms? And maybe since, Dr. Kupiec, you gave one, how about Dr. Michel? Is there some other reform? Mr. MICHEL. I have a list, several papers that have—I don’t know, maybe 15 different ones. But I think basically what you have to do is start one on the balance sheet, getting back to having a minimal footprint on the market, having them only do monetary policy in a very accountable way. I think that the approach and the format is the right way to go and that you make them benchmark against the rule. Everybody says—well, they are all gone, but everybody says that the format would tie the Fed to a mechanical rule, and that is not true. It would make them benchmark against a mechanical rule. Mr. EMMER. Right, it wouldn’t have— VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 37 Mr. MICHEL. So they could explain what they are doing and why they are doing it. And those are all positive approaches and improvements. Mr. EMMER. Dr. Dynan, we probably don’t see this exactly the same way. But in this context, I would think there has to be something that you have looked at that would be a helpful reform. Ms. DYNAN. So, first of all, I think that Dr. Kupiec’s idea is an interesting one. I certainly support giving Congress more time to review the monetary policy report written document before going to testimony. I think that could lead to a more constructive conversation. I think moving to a quarterly frequency for the testimony is also a good idea. My main concern is, I do not support more aggressive measures that would undermine the Fed’s— Mr. EMMER. What about winding down the balance sheet? You would agree with that. We should be doing that at some point, right? Ms. DYNAN. Oh, yes. And with that, I should say I agree with Dr. Michel’s earlier comments that it is really, really important that it is done gradually, and it is done predictively and transparently. Because I think—I was not asked what I thought the dangers were, but I do think the biggest dangers of a surprise— and even what the Fed does and even what it says, if the market suddenly says, hey, I didn’t understand what they are doing and now my view is totally different. I think that, too, would be very disruptive to financial conditions. Mr. EMMER. Mr. Pollock, same question, but I also want to add for you, is it time, at the very least, to eliminate the dual mandate? Mr. POLLOCK. Congressman, could I preface this by saying, I grew up in the City of Detroit near Schoolcraft Avenue. I think that could count as Main Street. I think we need to understand the Fed actually has at least six different mandates, and they can’t possibly do them all. They can’t perform what those with great faith in the Fed have faith that they will perform. That is why I think the accountability issue is so important, and what I call a grown-up discussion with the Congress, not a media event, but a grown-up discussion of the true uncertainties, the true alternatives, of how much of what is going on is debatable theory. That is essential in my view, including as you know from my testimony, that I think we should require the Fed to focus on the impact on savers and savings, as well as on all the other important things. Mr. EMMER. So if I am—if I go based on that, there are at least six different mandates. If we were going to give you the task of advising us, how would you rewrite the mandate for the 21st Century Fed? How would you rewrite it? Mr. POLLOCK. I would take them very much back to the original idea—what the founders of the Fed did in 1913, which was the overwhelming mandate was to help deal with crises and then other than that be mostly out of the way and let the market work. Mr. EMMER. Thank you. Chairman BARR. The gentleman’s time has expired. The Chair recognizes the gentleman from Ohio, Mr. Davidson. Mr. DAVIDSON. Thank you, Mr. Chairman. VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 38 Thank you all for taking some additional questions. To get near term and potentially practical, using conventional or unconventional means, is there anything the Fed could do to prevent a yield curve inversion? And if they could do it, should they? Anyone? Mr. MICHEL. I believe that everyone shows overall that the Fed can do very little to ultimately make interest rates do whatever they want. So I would have to say no, I don’t think that should be the goal. I think the goal should be getting back to a minimal footprint so that there is—so that there are as minimal distortions as possible from what they do. That is where I would come down on that. Mr. DAVIDSON. Thank you. Dr. Pollock? Mr. POLLOCK. Congressman, they could start selling their mortgage-backed securities and long-term Treasury bonds, and that would push up the long end of the curve and prevent an inversion. They won’t like it. That will cause big capital losses in the Federal Reserve itself, probably a large market-to-market insolvency. It would be interesting to see what would happen then. Mr. DAVIDSON. Any other comments on that? Mr. KUPIEC. What we have right now, I think, is very much a situation where the Fed really does control a lot of the term structure by its long-term holdings and its trying to control the shortterm rate. So these are pretty much administered interest rates. And if an inversion were to come and the problem there is normally, we think that reflects a looming recession. Why would you want them to hide the evidence? I am not sure that setting the rates would—if the rest—if the world were really tanking, I don’t know that raising the long-term interest rate would help anybody. Mr. DAVIDSON. That gets to the next question. So you just picked the next question is, so if they could manipulate the rates in this way and prevent the yield curve inversion, one way Dr. Pollock highlighted, dump assets in the long term, at least they certainly have plenty of them. It could be very market distorting, particularly if they are done rapidly, would that do what would be indicated? Would it avert a recession? This goes back to the whole limits of monetary policy. And so would it really do what it presumably be targeted at? Mr. KUPIEC. Some medicines treat symptoms but they don’t fix the underlying problem. They just mask them. So to the extent that you think the long-term interest rate is reflecting the real economy and something that is going on, manipulating long-term interest rate I don’t think is going to fix the real economy. And if we were heading for a recession, I don’t know why raising the long rate would do anything but make things worse. It might cosmetically hide the fact for a while, but I don’t know why that would be in the Fed’s interest to do that. Mr. DAVIDSON. Okay. Mr. MICHEL. And this is why they shouldn’t be in this position in the first place. Mr. DAVIDSON. Thank you. Okay. And they are in this position, I think summing up, because you go back to the scorpion and the fox, an analogy. The Fed is in VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 39 this position because that is what they do. They exist, therefore, they must do something. And they can’t resist the item passion to. How do we get the structure in place that the things they do aren’t inherently market distorting? Mr. MICHEL. So no more emergency lending. Open market and no more primary dealer system, flexible system that lets everybody who is eligible for a current discount window come. So it is marketwide liquidity. That is the only thing they do, period. And a flexible inflation mandate, a flexible price stability mandate and that is it. That is all you let them do. Mr. DAVIDSON. Thank you. Mr. Chairman, I yield back. Chairman BARR. The gentleman yields back. The Chair recognizes our final questioner, the gentlelady from Utah, Mrs. Love. Mrs. LOVE. Thank you. I just wanted to finish up some of the questioning that I was asking previously, so I appreciate the second round. But I wanted to get back to, Mr. Pollock, what you were talking about in your statement in terms of if you believe that the Federal Reserve had superior knowledge and insight into the economic and financial future, you would possibly conclude that it should act as a group of philosopher kings and certainly, enjoyed the independent power over the country. You also mentioned that it is unable, as we have all seen, consistently predict the result of its tone actions, and there is no evidence that they have any special insight. It is almost as if they are trying—it is worse than trying to predict the weather, because you are predicting interaction between private consumers, interaction between government and people. It is just the—it is incredibly monstrous. And you also mentioned that not only—it is not really a dual mandate. It is literally six different mandates. And to be fair to the Federal Reserve, they cannot do it all. And it is irresponsible for us to say that they can do right by the American people by giving them, literally, an impossible task. So here is what I wanted to ask: In order for consumers, households, and businesses to plan for the future and consume, save, invest most effectively, do they need to be confident that the prices will remain relatively constant over time? And do you believe that the Fed should spend more time on monetary policy and price stability as opposed to all of these other responsibilities that they have been given? Mr. POLLOCK. Thank you, Congresswoman. I do. Again, that they have the policy of acting in a crisis, which is useful, which was their original 1913 mandate. They called it in those days, ‘‘to create an elastic currency.’’ But when you put on top of that the notion that they are going to, as people say, manage the economy, and manage interest rates, now long as well as short term, and know what the right inflation rate is, all of these things, they can’t, in my judgment, possibly do it all, just as you suggest. It is my belief that the Congress was right—and this was a Democratic Congress in 1977—with the Federal Reserve Reform VerDate Nov 24 2008 20:11 May 04, 2018 Jkt 028222 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\28222.TXT TERI 40 Act, to try to exert the control of Congress over the Fed. They wrote, ‘‘price stability.’’ Now, we need to understand what price stability means. In my opinion, that is a long-term concept— Mrs. LOVE. Right. Mr. POLLOCK. —of price stability, which is, I think, best for consumers, investors, and economic growth. That means in any short term, prices may be going up, or they may be going down. But on average, over the long term, they are something close to flat. That is where I believe we ought to go. Of course, there are great debates about all these things among economists, Congresswoman, proving once again, that economics is not a science, but a set of competing theories. Mrs. LOVE. Okay. I know you want to add to that, so I am going to actually have you answer this question: If people understood everything that we were talking about, would you say that, in effect, the Fed would be doing more for maximum employment if they actually focused on price stability? And I am going to have you answer that, Dr. Michel. Mr. MICHEL. Yes. So yes, they would be. And what I was going to say is the great irony is that what Alex is talking about is exactly what used to take place before we had a Federal Reserve. The short-term price fluctuations were literally 1 percentage point greater than they had been since we had the Fed, but it would always come back to zero, the price level, more quickly. That is what we have gotten rid of. And the truth of the matter is that the Fed can do very little for long-term structural employment. The Fed has nothing to do with us having the lowest participation, laborforce participation rate that we have had since the 1970s. That is not the Fed’s fault. They can’t do anything other than stay out of the distortionary business by not messing around with so many things so that we don’t have a worsening employment situation. They should not be focused on trying to change something that they can’t change. Mrs. LOVE. And I would be so bold as to conclude that this is a result of Members of Congress not being willing to take on the responsibilities that they have and pushing it over to the Fed so that if something happens, we are not the ones who are accountable. And we need to take that accountability back. We are the ones who are accountable to the American people, and so I am going to conclude with that. Thank you. Chairman BARR. The gentlelady yields back. And I would like to thank all of our witnesses for their testimony today. The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. This hearing is now adjourned. Thank you. 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