[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

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

HEARING

BEFORE THE

SUBCOMMITTEE ON

DOMESTIC MONETARY POLICY

AND TECHNOLOGY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

__________

FEBRUARY 9, 2011

__________

Printed for the use of the Committee on Financial Services

Serial No. 112-3

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HOUSE COMMITTEE ON FINANCIAL SERVICES

SPENCER BACHUS, Alabama, Chairman

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

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

RON PAUL, Texas, Chairman

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

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

WITNESSES
Wednesday, February 9, 2011

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

APPENDIX

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

CAN MONETARY POLICY REALLY CREATE JOBS?

----------

Wednesday, February 9, 2011

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

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

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

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

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

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

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

February 9, 2011

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