[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]








                     UNCONVENTIONAL MONETARY POLICY

=======================================================================

                                HEARING

                               BEFORE THE

                        SUBCOMMITTEE ON MONETARY

                            POLICY AND TRADE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            DECEMBER 7, 2016

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-112
                           
                           
                           
                           
                           
                           
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
               Subcommittee on Monetary Policy and Trade

                   BILL HUIZENGA, Michigan, Chairman

MICK MULVANEY, South Carolina, Vice  GWEN MOORE, Wisconsin, Ranking 
    Chairman                             Member
FRANK D. LUCAS, Oklahoma             BILL FOSTER, Illinois
STEVAN PEARCE, New Mexico            ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
MARLIN A. STUTZMAN, Indiana          JOHN C. CARNEY, Jr., Delaware
ROBERT PITTENGER, North Carolina     TERRI A. SEWELL, Alabama
LUKE MESSER, Indiana                 PATRICK MURPHY, Florida
DAVID SCHWEIKERT, Arizona            DANIEL T. KILDEE, Michigan
FRANK GUINTA, New Hampshire          DENNY HECK, Washington
MIA LOVE, Utah
TOM EMMER, Minnesota





















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 7, 2016.............................................     1
Appendix:
    December 7, 2016.............................................    41

                               WITNESSES
                      Wednesday, December 7, 2016

Johnson, Simon, Ronald A. Kurtz Professor of Entrepreneurship, 
  Professor of Global Economics and Management, Sloan School of 
  Management, Massachusetts Institute of Technology..............     9
Levy, Mickey D., Managing Director and Chief Economist, Berenberg 
  Capital........................................................     7
Plosser, Charles, Visiting Fellow at the Hoover Institution, 
  Stanford University, and former President and CEO, Federal 
  Reserve Bank of Philadelphia (2001-2015).......................     5
Taylor, John, Professor of Economics, Stanford University........     4

                                APPENDIX

Prepared statements:
    Johnson, Simon...............................................    42
    Levy, Mickey D...............................................    47
    Plosser, Charles.............................................    54
    Taylor, John.................................................    75

              Additional Material Submitted for the Record

Mulvaney, Hon. Mick:
    Written responses to questions for the record submitted to 
      Mickey D. Levy.............................................    79
    Written responses to questions for the record submitted to 
      Charles Plosser............................................    81
    Written responses from Chair Yellen from a September 28, 2016 
      hearing....................................................    83

 
                     UNCONVENTIONAL MONETARY POLICY

                              ----------                              


                      Wednesday, December 7, 2016

             U.S. House of Representatives,
                           Subcommittee on Monetary
                                  Policy and Trade,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:08 a.m., in 
room 2128, Rayburn House Office Building, Hon. Bill Huizenga 
[chairman of the subcommittee] presiding.
    Members present: Representatives Huizenga, Mulvaney, 
Pearce, Stutzman, Schweikert, Love; Moore, Foster, Sewell, 
Kildee, and Heck.
    Ex officio present: Representative Hensarling.
    Also present: Representative Hill.
    Chairman Huizenga. The Subcommittee on Monetary Policy and 
Trade will come to order. Without objection, the Chair is 
authorized to declare a recess of the subcommittee at any 
time.Also, without objection, I ask unanimous consent that any 
member of the full Financial Services Committee who doesn't sit 
on this particular subcommittee be able to participate and ask 
questions during today's hearing.
    Today's hearing is entitled, ``Unconventional Monetary 
Policy.''
    I now will recognize myself for probably the better part of 
that 5 minutes. So lacking logic or evidence, today's macro 
economic oracles endorse unsustainable deficits and 
unconventional monetary policies. The oracles say the economy 
would be booming except for fiscal austerity. However, as the 
debt clock in this hearing room clearly shows that is often up, 
not unfortunately right now, but as often is displaying fiscal 
policy is anything but austere.
    Denying that their prescriptions created a heavy drag on 
our economy, the oracles point to ever-changing head winds. For 
example, they tell us that an aging population is causing labor 
force participation to plumb bottoms last seen in the 1970s. 
Their hypothesis is short on facts, however. For example, 
median age in the 1970s is a decade lower than today's. So if 
aging is a problematic, then the oracles would predict strong 
labor participation in the 1970s, even though it is the same 
disappointing level as today.
    The 1970s is also similar to the 2010s on another important 
dimension. Separated by four decades, they both suffered from 
distortionary economic and monetary policies. Refusing to let 
facts get in the way of fantasy, the oracles tell us that the 
American households would even be worse off except for these 
unsustainable deficits and unconventional monetary policies. 
The evidence. Well, we are doing better than the likes of Japan 
or the European Union. That story might fly in the faculty 
lounge, but it certainly doesn't around dinner table. The star 
pupil in the class of central banks gone wild has nothing to 
brag about.
    The American dream is at a risk. Pre-recession productivity 
meant that living standards could double every generation. 
Under today's opaque and distortionary monetary policies, 
however, productivity has been cut in half. The oracles call 
this the new normal.
    Well, I believe they are wrong. This is neither normal nor 
acceptable. Not too long ago our children could reliably look 
forward to the doubling of their living standards. Under 
today's monetary and economic policies, a doubling of living 
standard might instead wait for our children's children. With 
logic and evidence having left their side, perhaps the oracle 
should embrace the strategy from Seinfeld's George Costanza.
    Now, Mr. Chairman, I am not sure if we have ever quoted 
George Costanza in this committee, but here we go. ``If every 
instinct you have is wrong, then the opposite would have to be 
right.''
    The oracles tell us that without their seat-of-the-pants 
response to the Great Recession, our economy would be even 
further below potential almost 8 years post recession. The 
opposite would have had a hard time doing worse. Today's macro 
economics aim policies at highly aggregated variables that have 
little if anything to do with what drives our economy.
    Their answer for economic fluctuations is to further 
distort spending on consumption, investment, or government. But 
just as businesses cannot hide mismanagement for long behind 
the income statement manipulations, governments cannot mask 
malaise by diverting money into politically favored national 
income accounts. This pretense of knowledgehas grown from a 
macroeconomic orthodoxy where repeated failures of 
unconventional monetary and economic polices count as evidence 
that we didn't do enough.
    Economic opportunity reliably increases when monetary 
policy adheres to its vital duty, that is, facilitating 
commerce wherever it shows promise. Throughout our current 
economic malaise, monetary policy has not only ignored this 
duty, it continues to ignore the consequences of ignoring this 
duty. Annually, since 2007, the Fed's monetary policy committee 
predicted that its principle-free decisions would trigger a 
more resilient economy. Each year, reality fell further from 
prediction, and according to the Fed's own researchers, the 
FOMC, quote, did not anticipate the great recession, 
underestimated the severity of the downturn, and consistently 
overpredicted the speed of the recovery.
    A decade of economics-free monetary policy is not working 
because it cannot work. Returning to a robust economy requires 
a more firmly grounded and transparent policy. That transition 
cannot happen until the Fed shrinks its balance sheet, brings 
interest rate and credit risks out of the bureaucratic shadows. 
In the same vein, policy distortions will remain elevated until 
the Fed also returns to a monetary policy that does not only 
what it can, produce an efficient exchange medium so that goods 
and services, which includes labor, can easily find their most 
promising opportunities.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentlelady from Wisconsin, Ms. Moore, for 5 
minutes as well for an opening statement.
    Ms. Moore. Well, thank you so much, Mr. Chairman, and let 
me thank this distinguished panel for yet an opportunity to 
talk about our economy, our monetary policy, and to really sort 
of dig down deep into the theoretical and the what will really 
work in the real world and the practical application.
    I want to make a couple of observations about this, our 
what is it, Mr. Chairman, our fourth or fifth hearing on 
unconventional monetary policy. Which one? I yield. Is that 4th 
or 5th? Anyway--
    Chairman Huizenga. Pretty much any time we have been 
discussing monetary policy, it's been about--
    Ms. Moore. Great. And we have had a great discussion, 
particularly, Dr. Taylor, on your Taylor rule, so we have 
examined this in the abstract, I must admit. And speaking of 
dinner table conversation, this is great dinner table 
conversation, it is great economic journalism, but how would it 
have really worked in the real world? And we are having this 
conversation, of course, Mr. Chairman and witnesses, because we 
have faced an unprecedented financial crisis. So the Fed has 
done its job, and they have been forced into unconventional 
solutions.
    We know, from past conversations, that had we had a Taylor 
rule, the Fed, with its responsibility, would have had to have 
deviated from it at exactly this kind of--because of this kind 
of economic crisis. And I believe, Dr. Taylor, you will get a 
chance to talk to us some more in your testimony, but you 
yourself indicated to us that it was merely a guidepost. It was 
not something that was locked down.
    So it is not like we have had wild unruly monetary policy 
pre-crisis. I commend Dr. Taylor's work, recognize his utility 
and intellectual circles, but I don't see, Mr. Chairman, any 
reason for this committee to endorse the idea for real world 
application.
    Secondly, this hearing is admission by the majority that 
the real problem all these years has been Republicans' refusal 
to seek, demand side fiscal solutions to help the economy. 
Seventy percent of our economy is actually based on consumers 
having money in their pockets and being able to support a 
fledgling economy. The austerity measures supported by our 
Republican friends hurt the economy, hurt people, and force the 
Fed's hand on monetary policy.
    Now, you know, Republicans want us to buy the fact that tax 
cuts for the rich are the cure for this disease. Shareholders 
of the rich have been the ones helped by monetary policies by 
way of stock prices.
    Now, Mr. Chairman, if you want us to unwind the 
unconventional monetary policy, we need to look at ways to help 
the poor and the middle class, things like strengthening the 
safety net, like helping mothers, like investing in public 
education, how about public infrastructure? These are the kinds 
of things that stimulate the economy, the very things you will 
find in my bill called, ``The Rise Out of Poverty Act,'' 
helping everyday Americans still hurting in the housing 
downturn by robo foreclosures by men like our proposed Treasury 
Secretary who has helped himself by this government in crisis.
    Thank you, and I would yield back the balance of my time.
    Chairman Huizenga. The gentlelady yields back. Well, today, 
we welcome the testimony of four distinguished folks: Dr. John 
Taylor, professor of economics at Stanford University; Dr. 
Charles Plosser, visiting fellow at the Hoover Institution, 
Stanford University, and former president and CEO of the 
Federal Reserve Bank of Philadelphia from 2006 to 2015; Dr. 
Mickey Levy, managing director and chief economist, Berenberg 
Capital; and Dr. Simon Johnson, who is the Ronald A. Kurtz 
professor of entrepreneurship, professor of global economics 
and management, the Sloan School of Management at MIT.
    So each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony, and without objection, 
each of your written statements will be made a part of the 
record.
    With that, Dr. Taylor, you are now recognized for 5 
minutes.

  STATEMENTS OF JOHN TAYLOR, PROFESSOR OF ECONOMICS, STANFORD 
                           UNIVERSITY

    Mr. Taylor. Thank you Mr. Chairman, Ranking Member Moore, 
other members of the committee, and Chairman Hensarling for 
inviting me here to speak about unconventional monetary policy.
    I think the Federal Reserve's move toward unconventional 
monetary policy can be traced back a dozen years to so-called 
``too low for too long period'' of 2003-2005. During this 
period, the Fed held its policy rate, the Federal funds rate 
well below what was indicated by the experiences of the 
previous two decades of good economic performance. During this 
2003-2005 period, the Fed also started giving forward guidance 
that its policy rate would remain very low for a considerable 
period and that it would be raised only at a measured pace.
    These actions were a departure from the policy strategy 
that had worked well in the 1980s and 1990s. Regardless of the 
reasons, the results were not good. The excessively low rates 
along with promises that they would remain low brought on a 
risk-taking search for yield and excesses in the housing 
market. Along with a breakdown in the regulatory process, these 
policies were a key factor in the financial crisis and the 
great recession.
    During the panic in the fall of 2008, the Fed did a good 
job in its lender-of-last-resort capacity by providing 
liquidity to the financial markets and by cutting its policy 
interest rate. But then Fed policy moved sharply in an 
unconventional direction. The Fed purchased large amounts of 
U.S. Treasury and mortgage-backed securities in 2009, financed 
by equally large increases in reserve balances, which enlarged 
the Fed's balance sheet. And long after the recession ended, 
these large-scale asset purchases continued and the Fed held 
its policy interest rate near zero when indicators used in 
1980s and 1990s suggested higher rates were in order. The Fed 
also utilized forward guidance in this period would change the 
methodology several times, which increased uncertainty.
    My research and that of others over the years shows that 
these policies were not effective and may have been 
counterproductive. There is now a growing consensus that the 
extra low interest rates and unconventional monetary policy 
have reached diminishing or even negative returns.
    The unconventional policies have also raised public policy 
concerns that the Fed is being transformed into a multipurpose 
institution, intervening in particular markets, and allocating 
credit, areas where Congress may have a role but not a limited 
purpose independent agency of government.
    In many ways, this recent period can be characterized as a 
deviation from our rule-like systematic, predictable, 
strategic, and limited monetary policy that worked well in the 
1980s and 1990s. The policy implication of this experience is 
clear. Monetary policy should be normalized. The Fed should 
transition to a sound rule-based monetary policy like the one 
that worked in the past while recognizing, of course, that the 
economy and markets have evolved.
    As part of the normalization process, the size of the Fed's 
balance sheet should be gradually reduced. For reasons I gave 
when I testified at this committee last May, reserve balances 
should be reduced to the size where the interest rate is market 
determined rather than administered by the Fed as it sets the 
rate on excess reserves.
    Normalization is easier if there is an understanding of the 
basic monetary strategy. This and recent experience point to 
the need for monetary reform. A good reform is now part of the 
format. It would require the Fed to describe the strategy or 
rule of the Federal Open Market Committee for the systematic 
quantitative adjustment of its policy instruments.
    I think monetary normalization and reform have important 
implications for the international monetary system as well. 
Unconventional monetary policies with near zero policy rates 
have spread internationally to other central banks. Because a 
key foundation of a transparent rules-based international 
monetary system is a rules-based policy in each country, 
normalization and reform by the Fed is a key part of 
international monetary reform, and I think international 
monetary reform will in turn benefit the United States.
    In conclusion, let me emphasize that monetary reform, tax 
reform, regulatory reform, and budget reform often go together. 
They reinforce each other. All are crucial to a prosperous 
economy. I think the opportunity for monetary reform is now 
better than it has been in years.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Taylor can be found on page 
75 of the appendix.]
    Chairman Huizenga. Thank you. And with that, Dr. Charles 
Plosser, you have 5 minutes for your presentation.

  STATEMENT OF CHARLES PLOSSER, VISITING FELLOW AT THE HOOVER 
INSTITUTION, STANFORD UNIVERSITY, AND FORMER PRESIDENT AND CEO, 
        FEDERAL RESERVE BANK OF PHILADELPHIA (2001-2015)

    Mr. Plosser. Thank you, Chairman Huizenga, and members of 
the subcommittee, I appreciate this opportunity to come share 
with you some thoughts on the Federal Reserve.
    Let me begin with two important points that illustrate the 
challenges as we think about central bank reforms. Central 
banks, for the most part, are given the responsibility to 
preserve the purchasing power of a nation's fiat currency. One 
way the Fed does this is by buying and selling securities in 
the open market to control the growth of credit and money. This 
gives the Fed extraordinary powers to intervene in financial 
markets, not only through the quantity of it purchases but also 
of the types of assets it can buy.
    The second point is that history teaches us that economic 
stability and prosperity are far more likely when there is a 
healthy degree of separation between government officials who 
are responsible for tax and spending policy and those in charge 
of printing money. Otherwise, printing money seems to become an 
easy substitute for tough fiscal choices.
    Argentina is an example that has been stagnant and rife 
with periods of inflation and financial turmoil over the last 
three decades, at least. In large part, this is due to a lack 
of effective separation between the central bank and the fiscal 
authorities.
    These two points highlight a major tension in the 
discussions of central bank reform. How, in a democratic 
society, do you preserve a central bank's independence while 
ensuring that it has adequate tools for success and can be held 
accountable to the public?
    I believe there are three responsible ways to address this 
tension: Simplify the goals, constrain the tools, and make 
decisions more systematic and predictable. All three steps can 
lead to clear communications and a better understanding of 
monetary policy on the part of the public without undermining 
independence. In my brief time, let me just touch on two of 
these strategies.
    The Fed is said to have a dual mandate, price stability and 
maximum employment, yet the broader the mandate, the more 
opportunity there is for discretion, and the more discretion 
means there is more scope for political interference and 
uncertainty over the direction of policy. Policymakers can find 
themselves futilely chasing one goal after another.
    Unfortunately, over the last decade, the Fed's mandate 
seems to have experienced mission creep, expanding the scope 
for discretionary action, and the opportunity for political 
interference. The public and the Fed have talked as if monetary 
policy should be responsible for stock market valuations, 
income inequality, labor force participation rates, real wage 
growth, and an expanding list of other dubious objectives.
    Indeed, around the world, it seems that central banks are 
being asked to solve all manner of economic ills from fiscal 
crisis in Europe to low productivity and structural challenges 
in Japan and the United States. I think this is a mistake and 
potentially dangerous for the institution and the economy.
    Moreover, these broad mandates make it extremely difficult 
to hold a central bank accountable. I am reminded of the old 
saying: Responsible for everything but accountable for nothing. 
Institutions are guaranteed to fail when they are assigned 
responsibility for outcomes that they cannot substantially 
influence. The hubris of central bankers and the unrealistic 
expectations of the public and governments are out of line with 
what we can realistically expect for monetary policy.
    As the Nobel Laureate Milton Friedman warned us almost 50 
years ago, ``We are in danger of assigning to monetary policy a 
larger role than it can perform, in danger of asking it to 
accomplish tasks it cannot achieve, and as a result, in danger 
of preventing it from making the contribution that it is 
capable of making.''
    One way to address these concerns and to help reset 
expectations is to narrow the monetary policy mandate to focus 
solely or at least predominantly on price stability. Many major 
central banks around the world already have such a more narrow 
mandate or hierarchal mandate of this kind. It would focus the 
Fed's attention, reduce the opportunity for discretion, and 
make it easier to hold the Fed accountable for its actions. It 
would also provide some protection to the Fed from demands 
arising inside and outside central banks to pursue other mostly 
unachievable objectives.
    A second way to restrict central bank interventions is to 
limit the types of assets that can be purchased, thus 
constraining the composition of the Fed's balance sheet. For 
the U.S., I suggest that the Fed be restricted to an all-
treasury portfolio. During the crisis and recession, the Fed 
engaged in large scale purchases of mortgage backed securities 
in an effort to help the housing sector. It also purchased 
distressed securities during the rescue of Bear Stearns and 
AIG. Such actions are a form of credit allocation and thus a 
type of fiscal policy. Fed independence should not include 
making fiscal policy decisions as it undermines the separation 
of authorities and thus independence. Fiscal authority should 
take responsibility for fiscal actions.
    If the Fed is to engage in the purchase of private sector 
securities or credit allocation, it should do so at the request 
of the fiscal authorities. The Treasury should then take 
possession of those assets in exchange for Treasury securities 
so the central bank can resume its task of conducting monetary 
policy, and maintain the separation of fiscal and monetary 
policy remains intact. Thank you very much for your attention.
    [The prepared statement of Dr. Plosser can be found on page 
54 of the appendix.]
    Chairman Huizenga. Thank you, Dr. Plosser, and I have a 
sneaking suspicion that your Milton Friedman quote just beat my 
George Costanza quote.
    With that, Dr. Levy, we would like to welcome you here as 
well, and you have 5 minutes for your presentation.

   STATEMENT OF MICKEY D. LEVY, MANAGING DIRECTOR AND CHIEF 
                  ECONOMIST, BERENBERG CAPITAL

    Mr. Levy. Mr. Chairman and members of the committee, I 
really appreciate this opportunity not just to speak about 
monetary policy but also economic policies in general.
    The Fed's unconventional policies do deserve credit for 
lifting the economy and financial markets from crisis in 2008 
and 2009. However, it is quite striking that since then, Fed's 
sustained negative real interest rates, quantitative easing and 
forward guidance, while they successfully stimulated financial 
markets, pushed bond yields lower, pushed up asset prices, 
encouraged risk taking, they failed to stimulate the economy. 
Nominal GDP growth, that is, current dollar spending in the 
economy is actually decelerated. Real economies languished.
    In recent years, the Fed's unconventional policies have not 
had their intended impact but instead have created mounting 
distortion and have been inconsistent with the Fed's long-run 
objectives and its objective of macroprudential risk.
    Why have the Fed's policies been ineffective? Because the 
constraints on growth are nonmonetary in nature. Along with 
many factors, government policies have been a key source of the 
weakness. The adverse impacts are particularly apparent in 
business investment. Consumption and housing have been growing 
fine, but business investment has been notably weak, and this 
has not only been the weak link in the economy, it has been the 
source of the weak productivity and estimates of lower 
potential growth.
    Beyond the mounting government debt and expectations of 
higher taxes, there has been just this growing web of 
government regulations, mandated expenses, and higher tax 
burdens not just on the Federal level but on the State and 
local levels that have weighed very heavily not just on the 
banking and financial sectors but also in business investment 
and the broader economic environment.
    The burdensome micro regulations imposed by Dodd-Frank have 
deterred bank lending, particularly of medium- and small-sized 
banks, and they are at cross-currents with the Fed's easy 
monetary policy. In nonfinancial sectors, an array of 
regulations and government mandated expenses and taxes have 
reduced efficiencies of production, inhibited labor mobility, 
and lowered risk adjusted after tax rates of return on 
investment, and they have added a tremendous layer of 
uncertainty in business decisionmaking.
    So while the Fed has very effectively lowered the real cost 
of capital, these government policies have forced businesses to 
raise their hurdle rates required for capital spending and 
expansions. So potentially productive expansion plans have been 
sidelined, businesses are taking advantage of the low interest 
rates environment provided by the Fed to issue bonds, but they 
are buying back stock rather than expanding, corporate 
indebtedness rises, and it doesn't add to productive capacity, 
and also, there are a lot of distortions in labor markets.
    The critical point here is these policies are beyond the 
Fed's monetary policy scope, and trying to offset these 
negative impacts with excessive monetary eases, generated 
mounting financial distortions, and unfortunately, I think just 
now we are just beginning to feel the negative effects of the 
Fed having been too easy too long. The next couple of years may 
be kind of tough.
    So the Fed has recently come to acknowledge that its 
monetary policies have lost their punch and has recommended a 
shift toward fiscal stimulus. So before I outline some 
suggestions for monetary policy, I have a critical point to 
make on fiscal policy.
    It is critically important to distinguish between fiscal 
reform and fiscal stimulus that simply involves more deficit 
spending. The economy is in its eighth consecutive year of 
expansion, the unemployment rate is 4.6 percent, and the 
economy is growing at a pace consistent with the Fed's 
potential. What is not needed is countercyclical fiscal 
stimulus in the form of more deficit spending.
    The focus of fiscal reform should be tax and spending 
reforms that raise potential growth, corporate tax reform which 
involves lower rates and a broader base through reducing 
deductions, deferrals, credits, exemptions, these and lower 
rates and simplification, this would encourage business 
investment and expansion.
    Infrastructure spending initiatives, we have to focus on 
projects that add to productive capacity and provide benefits 
that exceed cost while avoiding quick-spend projects aimed at 
temporarily boosting growth and jobs. I mean, it is critically 
important. Reform, fiscal reform does not just mean more 
deficit spending, and that is going to be critically important 
as we enter 2017.
    Now, on monetary policy and--
    Chairman Huizenga. Dr. Levy, I am going to have to ask you 
to wrap it up here quickly.
    Mr. Levy. Quickly. Raise rates, cease reinvesting--cease 
reinvesting maturing assets, de-emphasize the short run and 
fine tuning, change policy statements accordingly, and move 
toward more rules-based policies that provide flexibility.
    [The prepared statement of Dr. Levy can be found on page 47 
of the appendix.]
    Chairman Huizenga. I will yield some of my time to allow 
you to expand on that when we come back to questioning.
    So with that, Dr. Johnson, you have 5 minutes.

   STATEMENT OF SIMON JOHNSON, RONALD A. KURTZ PROFESSOR OF 
ENTREPRENEURSHIP, PROFESSOR OF GLOBAL ECONOMICS AND MANAGEMENT, 
    SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS INSTITUTE OF 
                           TECHNOLOGY

    Mr. Johnson. Thank you, Mr. Chairman. I agree with you 
completely, Mr. Chairman, with regards to your initial 
statement on the fact that this is not normal, what we have 
now, and it is not acceptable. I think you and I may have a 
slightly different reading of recent economic history, but 
maybe it is not that different.
    We had an enormous financial crisis and collapse. I was the 
chief economist of the International Monetary Fund in 2007 
through August 2008. We were worried about how bad it was 
getting in the United States, and we encouraged preventive 
measures. None of that was effective, and the crisis turned out 
to be much bigger than what we anticipated and much bigger than 
what we had seen and what I had worked on over the past 30 
years.
    Now, I agree with Chairman Hensarling that an 
undercapitalized financial system was the core of what went 
wrong. I think we disagree on some of the ancillary related 
measures, but capital, lack of capital in our financial system, 
and funding it with way too much short-term debt was the core 
problem. Massive financial crisis result in anemic recoveries. 
I am afraid that is not--that is not just astatement about the 
United States. That is a general statement about what we have 
learned over the past 200 years of finance and economics.
    The second point on which I share, I think--I certainly 
agree with most of my fellow panelists is that monetary policy 
is a limited tool that cannot do very much. And I think it is--
and I agree with Dr. Plosser, you shouldn't overreach with 
monetary policy. I would say, and I think I have seen this in 
some of the other testimony, including Dr. Levy's, that QE1 
done at the end of 2008, 2009, absolutely unconventional 
monetary policy, yes. Specifically targeted supporting 
mortgage-backed securities and a piece of the key pipeline for 
credit and securities markets that are broken completely, that 
is what they did. I think it was a good idea. The fog of war 
applies in finance as well as in war, you don't know exactly 
what is happening at the time, but I fully support what the Fed 
did in that instance.
    Subsequent iterations and attempts to continue with that 
policy, we can discuss. I think much less effective would be a 
fair way to say it, and that is also what Mr. Bernanke says.
    Rules can help monetary policy, and if, hypothetically, Dr. 
Taylor or Dr. Plosser end up back on the FOMC, I will be fully 
supporting their rights and ability as members of that 
committee to determine rules. I really don't think you want to 
micromanage the Federal Reserve. It is not what we have been 
historically. You can set the objectives, and I commend you, 
Mr. Chairman, for focusing our attention on that. I think you 
should continue with the existing objectives personally, but I 
think we are going to discuss that a lot more.
    The third part of what went wrong in the economic history, 
which is a piece I am sure we absolutely disagree on 
completely, which is fiscal policy. Again, former chief 
economist at the IMF. I don't run around the world telling 
people to stimulate their economies, and I am not in favor, 
generally speaking, of using fiscal policy for any, any short-
term response to anything, all right. That is more a job of 
monetary policy if, you know, subject to Taylor rule type 
considerations.
    However, again, largest financial crisis since the great 
depression, limited ability of monetary policy to respond, QE1, 
but perhaps we are not convinced of anything beyond that, what 
else do we have? We have a massive crisis. You said--actually, 
I liked your formulation of monetary policy, was one of my 
favorites ever, I wrote it down: Monetary policy should be to 
facilitate commerce. Absolutely. Completely correct.
    The private sector economy was broken, and 99 percent of 
people in the private sector economy had no responsibility for 
what went wrong. They were completely innocent bystanders, and 
that includes all the people in finance, by the way. They were 
just doing their jobs. Devastating impact, limited ability of 
the government to respond with monetary policy, what else are 
you going to do?
    In those circumstances, and only in those circumstances, I 
think, and I testified before other committees of Congress to 
this effect at the time, some fiscal stimulus, including large 
tax cuts, I argued for bigger tax cuts than were actually put 
through by this Congress, by the way, as well as other measures 
on the spending side.
    We are out of that phase. Now the issue for fiscal policy 
is medium term, how do we get away from this for normal, 
``normal,'' how do we get to higher rates of growth? And here I 
am completely siding with Congresswoman Moore. I work a lot 
with the private sector. My job at MIT is to help companies 
grow in the United States and around the world. What do they 
need? They need people. They need human capital. They need 
infrastructure.
    I am not saying that this is the miracle cure. I am not 
saying you do it on a 1- or 2-year time horizon, but I think 
over a 10- to 20-year period, when you look at productivity 
prospects in the United States, when you look at our ability to 
compete, when you look at the ability of our companies to stand 
up and to do better than other companies with regard to 
innovation and employment, people, really good people. And of 
course, that is about opportunity. It is about who gets the 
education and who can climb up the social ladder, which we used 
to be good at in this country, but unfortunately, the past 
three decades, we have lost that.
    Thank you.
    [The prepared statement of Dr. Johnson can be found on page 
42 of the appendix.]
    Chairman Huizenga. I appreciate that. Thank you very much. 
At this point, I will recognize myself for 5 minutes, and I 
would like to go back to Dr. Levy because I think we have 
stumbled into something, and we did this in another hearing 
previously with the ranking member and myself that we agree 
that, frankly, the rich on Wall Street have gotten richer, 
while most others have been left behind. And kind of getting to 
where Dr. Johnson was going, you know, the question is, is why 
and how.
    And is this because we have not borrowed enough money to do 
more stimulus spending, as some would seem to argue, or--and 
Dr. Levy, when you were talking about this, I had written this 
out on my notepad of a recent example. I sat down with a CEO of 
a publicly traded company, large influential, sort of in the 
financial services space, and he walked me through the 
pressures that he is feeling from his shareholders, including 
institutional investors like CalPERS and others to take 
advantage of the artificially low interest rate environment, to 
borrow money, to then buy back his own stock, and as he said, 
or the stock of a publicly traded company, as he said, I have 
become fabulously wealthy. In fact, I looked it up. He has just 
cashed in a seven figure amount of stock again. He said: I have 
become fabulously wealthy, but it is not the right thing for 
the economy overall.
    And it was in stark terms, and he is like, but if I don't 
do this, so you know, I have one small little corner of this, 
but I have CalPERS, and I have a number of other institutional 
investors who literally could take me to court for not 
fulfilling my requirement of maximizing the return for them. 
And that was rather stark for me, and I just wanted you to 
maybe comment on that a little bit, and I would love to hear 
from all four of you quickly.
    My original question, has the Fed become more political, 
and I kind of maybe altered this, changing it slightly, has the 
Fed been politicized is really what I want to know. And so Dr. 
Levy, I want to start with you and give you a brief opportunity 
as well to touch on, and if you had any of those other points 
that you wanted to make towards the end when I had to cut you 
off, so--
    Mr. Levy. Has the Fed become politicized? Yes, on the 
inside the way it operates and on pressures from the outside, 
and I think it is a real concern because we all benefit from a 
central bank that pursues its long run objectives, and so I--
there is a laundry list of ways that the Fed has become much 
more politicized.
    Back to your point on Wall Street, and I am an economist 
and not an investment banker that has benefitted by all the 
Wall Street largesse. Wall Street makes a lot of money through 
leverage, okay, and so, you know, when they have had low 
capital positions and a lot of leverage and they have played 
the positive carry game and taking advantage of their leverage, 
this generates very large profit. So I would be very much in 
favor of legislation that requires higher capital adequacy 
while at the same time reducing a lot of the micromanagement 
from the Fed, the OCC, and the like. And so I think this would 
be--that would lead to better balance of people on Wall Street.
    Chairman Huizenga. And isn't it true that--I mean, 
companies, whether they are in the financial services space or 
whether they are, frankly, in manufacturing or any other space, 
they are not just looking at tax rates. They are looking at the 
regulatory environment that is causing uncertainty, correct? I 
mean, when they are going in, I think that is why we have 
seen--at least some would argue that we have seen some 
rebounds, in the overall optimism, is that there is going to be 
some stability, hopefully, and some predictability in the 
regulatory space, not just in that tax space.
    Mr. Levy. I completely agree. Surveys of businesses, they 
are big--business' biggest concern, of course, is product 
demand, but right behind that are concerns about taxes and 
regulation. So once again, while the Fed has been very 
successful lowering the real cost of capital, businesses, when 
they think about expanding and investing, their hurdle rate is 
pushed up by taxes and by regulations not just on the Federal 
level but the State and local levels where they operate, and it 
adds a huge layer of uncertainty, and they have to put that in 
their calculation.
    And so unwinding that, the build up in regulations, I 
think, would really lift a great cloud off of business 
investment, and expansion, and employment. And I think what I 
think the other panelists would totally agree with me on is if 
you could put in place policies that would lift productivity 
and potential growth, that would lift real wages.
    Chairman Huizenga. All right. And unfortunately, my time 
has expired. I wanted to get to a comment from Jeffrey Lacker 
about markets being better judges of creditworthiness than 
central authorities, but maybe we will have a round two or one 
of my colleagues can pick up on that as well.
    So with that, I would like to recognize the ranking member 
for 5 minutes.
    Ms. Moore. Thank you so much, gentlemen, and of course it 
is a pleasure to have you all here. I just want to start with, 
I think, Dr. Levy. This is very sound testimony from you, and I 
got really, really interested in your comments on page 1, 2, 3, 
4, where you talked about household behavior, and dim 
expectations of disposable income and so on, people--household 
spending more money on health care, tight mortgage credit 
standards, and so I guess where I am leading to this is some 
comment or observation on your part about the lack of income, 
of the policies, the austerity policies that were put in place 
here while simultaneously experiencing this downturn.
    Do you see that there is any nexus between the tightening--
because you say here monetary policy can only do so much, so do 
you see any nexus between the lack of income that people have 
and the inability for our economy to grow?
    Mr. Levy. So real, or inflation just as disposable income, 
has been growing at a moderate pace, and the data show that 
people are basically spending it, so consumption is growing, 
once again, at a moderate but not a robust pace, and you know, 
at the same time, some government regulations and government 
mandated expenses, particularly in health care, have forced 
households to allocate more of their out-of-pocket spending 
toward healthcare insurance premiums and the like.
    Ms. Moore. So just to be clear, you don't necessarily see 
$7.50 an hour as the minimum wage as contributing to the slow 
growth. You see it all being caused by, of course, the downturn 
in the market, the lack of regulation--I think somebody 
testified to the lack of regulation being one of the causes, so 
you don't see the lack of income on people's part as 
contributing to this?
    Mr. Levy. My honest assessment is the biggest factor that 
is inhibiting stronger wage growth is productivity, and I 
think--
    Ms. Moore. People are more productive than they have been. 
Maybe, Dr. Johnson, maybe you can help me out here.
    Mr. Johnson. So I think the--where you are going with this, 
Congresswoman Moore, is absolutely correct, that the impact of 
fiscal policy and austerity has been disproportionately at the 
lower end of the income scale. Obviously, income inequality has 
been a issue with us for a long time, and the big question we 
have, and also to the point the chairman raises, if 
productivity increases, that is good, it creates potential for 
wages to rise, but wages at the lower end, incomes at the lower 
end of the income scale have not risenvery much over the past 
three decades, actually, so there is a bigger problem there, 
and I think that is one reason why raising the minimum wage to 
an appropriate degree would be part of a response that would 
make some sense.
    Ms. Moore. And you know, lack of providing adequate monies 
for infrastructure, educational funding and so on.
    Dr. Taylor, I just want to--since you are our distinguished 
guest here, I do want to give you a chance to answer a couple 
of questions.
    You think QE1 was okay, right, but not the other monetary 
policy? Is that--did I hear your testimony correctly?
    Mr. Taylor. There is sometimes confusion of what QE1 means. 
To me that was the purchases of securities--
    Ms. Moore. Right.
    Mr. Taylor. --in 2009. There was also a big intervention in 
2008, and that is the one, that is the lender of last resort, 
to firms in distress, liquidity operations, and those actually 
phased out very early 2009. It is really after that that I 
think there was questions about the effect.
    Ms. Moore. Okay. Thank you. I just want to ask, in my last 
25 seconds, back to you, Dr. Levy, fiscal reform versus fiscal 
stimulus. So is it your testimony really that fiscal stimulus 
would not be an effective tool? And this, of course, would be 
done in Congress, not as a monetary policy.
    Mr. Levy. I would love to see fiscal stimulus, but I think 
that involves more--not just increasing deficit spending that 
provides income support and gooses up jobs in the near term, 
but increase spending, reallocating spending in a way that 
helps out the economy in less productive capacity. And once 
again, if you look at the whole size of the government's 
budget, there is certainly enough ways to reallocate, to spend 
a lot more on things like infrastructure, education, and 
training.
    Ms. Moore. Thank you. Thank you, Mr. Chairman, for your 
indulgence, and I yield back.
    Chairman Huizenga. You are very welcome. And with that, I 
would like to recognize the vice Chair of the committee, Mr. 
Mulvaney for 5 minutes.
    Mr. Mulvaney. Thank you, Mr. Chairman. The last time that 
Janet Yellen was here, she and I had a chance to talk very 
briefly about another type of unconventional monetary policy 
that we haven't discussed yet today, and that is the purchase 
by central banks of actual equities.
    She had given a speech, I asked her a couple of questions, 
and I had a chance to follow up and ask her some questions, 
written questions for the record, and I want to read you, 
gentlemen, very quickly, the three paragraphs in that letter, 
and also, I would like to add the record to the--the letter to 
the record.
    Chairman Huizenga. Without objection, it is so ordered.
    Mr. Mulvaney. This is her response. It says: In my remarks 
at this year's economic symposium in Jackson Hole, I noted the 
challenges for monetary policy posed by the effective lower 
bound on interest rates and the possibility that when they face 
these challenges more frequently in the future, given the 
apparent decline in the so-called equilibrium real interest 
rate. To address such challenges, I noted that monetary 
policymakers may again need to rely upon unconventional tools 
such as forward guidance and asset purchases to promote 
statutory goals such as maximum employment and stable rates.
    On the subject of asset purchases, it is important to note 
that the Federal Reserve Act provides authority for the Federal 
Reserve to purchase only a relatively narrow risk--excuse me--a 
narrow range of low risk assets such as Treasury and agency 
securities. The Federal Reserve does not have the statutory 
authority to purchase a broad range of private sector 
obligations such as corporate bonds, equities, asset-backed 
securities, or household debt.
    In contrast, other central banks such as the European 
Central Bank, the Bank of England, the Bank of Japan, and the 
Swiss National Bank have the authority to purchase a relatively 
wide range of financial assets. Moreover, these central banks 
have utilized their authority in recent years in different ways 
to address severe economic shock.
    And she and I went on to talk about the fact that I think 
the Bank of Japan and then I think Swiss bank had actually 
started buying equities. The Bank of Japan, I think was buying 
ETFs. I can't remember what the Swiss were buying.
    So let's talk about this other unconventional type of 
monetary policy. We will start with you, Dr. Taylor. Your 
thoughts on that generally. Have you given any specific 
consideration to this topic?
    Mr. Taylor. Well, I think the Fed should stay away from 
buying equity.
    Mr. Mulvaney. Why is that?
    Mr. Taylor. Simple as that. Because first of all, it is a 
form of quantitative easing, and it is other things to do with 
respect to monitoring. Monetary policy can adjust its balance 
sheet to make the interest rate move in a desired way without 
touching equity. There is plenty of securities to buy.
    So I think it also goes in the direction of potentially 
helping certain firms and not others. It is a form of 
intervention, which is, seems to me, not broad based or limited 
as monetary policy should be. You can choose one firm versus 
another. There is also some things that can happen and it is 
not necessary.
    Mr. Mulvaney. And in fairness to her, she went on through a 
list of advantages and disadvantages, so I couldn't read the 
whole letter. But when she comes back and if she were sitting 
here and you are having a conversation, and she says: Yes, 
John, but we are out of bullets, we need something else. What 
would your response be?
    Mr. Taylor. I don't think you need anything else. I think 
we, have had a lot of history, we even had ideas about what to 
do at the so-called Zero Bound, which doesn't require that. It 
is some indication of what is going to happen after the Zero 
Bound. There has been lots of work on that. There is plenty of 
other securities to buy to set monetary policy.
    Mr. Mulvaney. Dr. Plosser, Dr. Levy, I would curious to 
know your thoughts. As I am not going to get a chance to ask 
you questions, I would do it in writing, because I enjoy my 
back and forth with Dr. Johnson so much, because he is a really 
good participant in these hearings.
    So Dr. Johnson, I give you the last minute-and-a-half of my 
time. What are your thoughts on this particular unconventional 
monetary policy?
    Mr. Johnson. Well, I think I am going to surprise you, Mr. 
Mulvaney. I think you are asking a very good question, and this 
is the right time to ask it, in a time of peace not-- and I 
agree with you. I don't think--I agree with Mr. Taylor.
    Mr. Mulvaney. I yield back the balance--no, I am sorry.
    Chairman Huizenga. The Chair will suspend the clock here 
because I am not sure we have ever seen a compliment like that 
paid to the vice chair, so--
    Mr. Johnson. I am happy to make your day. So I think that, 
in the United States, I would stick with the authority that the 
Fed has, and I think that is what I heard Dr. Taylor said. I 
can't imagine circumstances in the United States in which 
buying equities would be appropriate. Other central banks do 
different things because different market structures, sometimes 
they feel they don't have enough bonds and so on. I am not 
going to comment on that, you know.
    I don't think that--you know, what Dr. Taylor--you don't 
want the central bank to be directing credit, you don't want to 
be playing favorites, you don't want to be--you know, I think 
the Fed is politicized from the outside, as Dr. Levy said. I 
think they have actually retained an impressive degree of 
nonpoliticalization on the inside. If you they get into 
allocating credit more than they have, that will be a problem.
    So just on QE1, if I might. What they did was a specific 
purchase of mortgage-backed securities that were underwritten 
by or issued by Fannie Mae and Freddie Mac, which have been 
taken over by the government. So they have to buy government-
backed securities, no credit risk, that included those housing 
securities at that moment. I think actually we are agreed--so 
that is a slightly uncomfortable we should discuss also, but I 
think what you heard from all of us is at that moment, not a 
bad call given the fog of war that they faced, but you know, I 
think you should push us on that.
    Mr. Mulvaney. Thank you, diligent gentlemen. Dr. Plosser, 
Dr. Levy, again, my apologies, in the limited time I didn't get 
a chance to ask you, but I do hope to have a chance to follow 
up in writing. Thank you. Thank you, Mr. Chairman.
    Chairman Huizenga. The gentleman yields back. And with 
that, we will recognize Mr. Foster of Illinois for 5 minutes.
    Mr. Foster. Thank you, Mr. Chairman, and thank you to our 
witnesses here. You know, one of the most important inputs to 
monetary policy is inflation, and there is a strand of debate 
going on in economics right now about whether we are 
significantly mismeasuring inflation in large part by 
underestimating the technological price reductions and quality 
improvements or just the existence of products that were not 
previously available.
    I mean, examples of this are medical care, for example. If 
you give the average person the choice of having today's 
medical care at today's prices versus 1970s medical care at 
1970s prices, most people would choose today's medical care, 
which tells you mathematically that healthcare inflation has 
been negative; whereas, in fact, we carry it on our books at 6 
percent a year, and that's, I don't know, 17 percent of the 
economy, so it is not a small error, if this is true.
    There are other things. You know, we carry in our pockets a 
super computer that has a value of tens of millions of dollars 
in 1970 dollars and somehow we are not scoring it in a naive 
way.
    And you know, this drives the debate in a number of things 
when you ask the question is the median family better off than 
it was a generation ago? You know, if you look at the basket of 
goods by the median family a generation ago versus today, you 
know, I think most people would agree it is better off, despite 
the fact that if you look at, you know, the wealth or income of 
the median family, it is not so good. So that so my questions 
are this.
    First, you know, do you agree with this narrative that we 
are actually making a significant error in how we are measuring 
inflation? And secondly, what are the implications for monetary 
policy if in fact we are not measuring inflation properly? 
Anyone who is up for fielding any part of that.
    Mr. Johnson. I think, Mr. Foster, it is a very good point 
and a rather broad and subtle point which affects both how we 
think about inflation and obviously purchasing power, and you 
are right, that where we have--some parts in our consumption 
basket didn't exist or where it would have been--would have 
cost a fortune previously, and we don't take that into account 
very well.
    I think to the point about monetary policy, which is 
obviously the focus today, this is heuristic that central banks 
have. There is nothing that says that inflation should actually 
be 2 percent. I mean, there is no law of economics or physics. 
That is a heuristic that was developed over a very long period 
of time where central banks feel that at that rate of 
inflation, you can facilitate commerce, you can have growth, it 
is consistent with high levels of productivity growth in the 
past.
    Now, that heuristic may change. I mean, I think this is 
why--I like what John Taylor has said in his testimony, which 
is the Taylor rule is not a hard and fast this is the law. It 
is guidance which Doc Taylor spotted and helped us understand 
in terms of what the Fed did in the past.
    So a good reason not to micromanage the Fed going forward 
is we want to have very smart people there on the board of 
governors, and I am confident that Congress will put smart 
people--the President will put smart people in there in the 
next iteration, and they need to be thinking about all these 
issues, including this one, Mr. Foster, and think about, okay, 
how do we continue to operate monetary policy, is it the 2 
percent implicit inflation target with the dual mandate, which 
I think works, and other people on the panel don't think it 
works, but that is a decision I--I mean, Congress sets the 
mandate.
    I think you want the Fed, the board of governors, and the 
FOMC to have the ability to think deeply about these issues. A 
lot of very smart people there, a lot of engagement with the 
private sector, and think about do we have the right way of 
managing monetary policy, do we have the right implementation 
of monetary policy given the kinds of concerns you are raising.
    Mr. Foster. Anyone else have--I mean, it was--specifically, 
if we conclude that we are mismeasuring inflation by say 1 
percent, what implication would that have for monetary policy? 
I am just, I guess, from a straight mathematical point of 
view--
    Mr. Taylor. So I would say, first of all, our measures of 
inflation are--they are different. There is different measures, 
and it is a constant decision for central bank, the Fed to 
decide which one, and so they have gone through it, and we also 
have statistical agencies that worry about the problems you are 
saying. I am not saying they do it effectively, but they try to 
take into account.
    Given all that, it seems to me monetary policy should take 
the indicators that are there and stick with those. If there is 
a lot of evidence that there is something wrong because of the 
computer technology you are mentioning, then we need to know 
that. It is actually, to me, almost more important a problem 
for measuring productivity. I think productivity growth is very 
low now. It is distressing. That is why I think we need to 
actually reform regulatory reform.
    Some of my colleagues in Silicon Valley say, no, we are 
just fine. We are doing great in productivity. I don't think 
so, but that is really, I think, where the productivity issue 
really comes to be most important.
    Mr. Foster. Also, the divergence of labor factor, 
productivity, and you know, machine factor productivity is, I 
think, accelerating and will become very significant in our 
thinking in the coming decades. Any other comments on the 
inflation issue?
    Mr. Plosser. I would just reiterate what both the other 
panelists said. For monetary policy purposes, it is, yes, you 
need to be aware of the mismeasurement, but it is a heuristic, 
it is a way to commit to something, and it doesn't mean it is 
the optimal or the best rate of inflation. A lot of people 
would have argued the inflation rate target should have been 
lower, some think they should have been higher, but it is a 
guide to policy, not so much as an objective way.
    I would also point out that if inflation, true inflation is 
really much lower than we think it is, then it means things 
that we do to calculate, for example, real wage growth over the 
last 30 years, would suggest that actually real wages are 
higher than we think they are because inflation has been lower 
than what we made.
    Mr. Foster. Which would change the narrative we see in our 
politics tremendously.
    Mr. Plosser. Exactly. Exactly. So you know, I think there 
are lots of--I think we need to distinguish that issue from the 
issue of what is useful for monetary policy purposes, and I 
think that is what John was getting at.
    Mr. Foster. Yes. So what you are saying is essentially it 
is--as long as you have a stable definition and you are using 
it as your feedback loop, you know, your--
    Mr. Plosser. For monetary policy purposes, that is the 
critical.
    Mr. Foster. But it is still a useful thing to make a stable 
feedback group. All right. Well, I guess that was my main 
question.
    Mr. Mulvaney [presiding]. The gentleman's time has expired. 
I thank the gentleman. I now recognize the gentleman from New 
Mexico, Mr. Pearce for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman. I appreciate each one 
of you being here today. John Taylor mentions in his paper, his 
presentation that maybe the Fed should start selling assets.
    So Dr. Plosser, I think you might be the one who is closest 
to the process. What would happen if the Federal Reserve 
started selling mortgage-backed securities that they purchased 
back at a time when you were in the system?
    Mr. Plosser. Well, I think the committee and the Fed was 
terribly worried about the effect of selling securities into 
the open market. They certainly expressed concern about that. 
But I think that the first step the Fed ought to be taking is 
not selling, necessarily. I think what they could stop 
reinvesting would be a good practice because, in effect, they 
are still buying securities in the open--buying mortgage-backed 
security to replace the ones that run off just naturally. So I 
think they wouldn't have to start selling securities 
immediately. They could just stop reinvesting.
    I would also note that the process of selling securities, 
now that the financial crisis and the functioning of the 
markets is highly--has returned to more normal activities, one 
of the concerns during the purchase of securities was that the 
markets weren't functioning very well. There was sort of lots 
of gaps, there were lots of concerns about where buyers and 
sellers were, and some of the trading and information in 
arriving at prices.
    That is no longer the problem anymore.
    Mr. Pearce. Have all of the valueless MBS' been choked out 
of the system?
    Mr. Plosser. Right. So I think--
    Mr. Pearce. The ones with no value are gone. They are not--
they don't exist anymore?
    Mr. Plosser. Well, not many of them, no, but we are still--
but the Fed is still buying them. So I think there is less of a 
problem now to disrupt--
    Mr. Pearce. What happened to the ones with no value? I 
mean, I think we--that was at the basis of what caused the 
collapse.
    Mr. Plosser. Right.
    Mr. Pearce. Valueless loans that were made across the 
country--
    Mr. Plosser. The Fed was buying--
    Mr. Pearce. Secured by and put in--so what happened to 
them? They just vaporized? What, I mean--
    Mr. Plosser. Well, some of them restored some of their 
value. The Fed was busy trying to make a market.
    Mr. Pearce. So they have achieved some value.
    Mr. Plosser. So they have achieved--
    Mr. Pearce. Dr. Levy--I mean, Dr. Levy, I was interested in 
what your perception is on the answer to Mr. Mulvaney's 
question. I looked back several years ago, and the State of 
Ohio started buying assets. They got into buying coins, chasing 
yield, trying to find anything they could do, and so this idea 
of buying assets is one that is concerning, and then when you 
look at the CalPERS, I think the Chairman Huizenga mentioned 
them, all of the pensions are going to be chasing yield because 
they are promising payouts based on totally false assumptions 
that they can make 6 to 7 percent in the market, so they are 
paying out to the recipients.
    So I would like your observation on what chairman--or what 
Vice Chairman Mulvaney asked about the process of buying assets 
and stocks.
    Mr. Levy. Well, let me just address your first point.
    Okay. So the Fed has, through its QE programs increased 
excess reserves in the banking system up to about 2-1/2 
trillion and the Fed's balance sheet is nearly 4-1/2 trillion, 
and it has kept rates artificially low. And this has create the 
distortions. And now as I think the Fed begins to normalize, 
particularly, I believe, there is an economic regime shift 
underway and rates are going to rise, there is going to be 
pain.
    But during the period of low rates, it has forced insurance 
companies, pension funds, and the like to, you know, reach for 
yield, take on more risk than they would otherwise. And there 
is a downside of that that we are going to face now.
    Now, with regard to QE, should the Fed be buying stocks? 
Absolutely not. For what purpose? Do you want the stock market 
to go higher? And as Dr. Johnson said, do you want the FOMC 
members to deliberate on which companies to boost? It makes no 
sense.
    And all of the excess reserves and low rates have not 
stimulated aggregate to manning the economy the last 5 years. 
So for what purpose?
    Mr. Pearce. Isn't that a process they have moved into in 
Japan and isn't that one of the causes of trouble? Again, I 
will just yield to you, Dr. Levy.
    Mr. Levy. When we look at Japan, let's call a spade a 
spade.
    The central government runs a very large budget deficit, 
very large, and primarily to finance retiree pensions, and they 
don't want it to show up in their general--as an increase in 
the outstanding debt, publicly held debt, and so they use the 
Bank of Japan, and they stuff--the BOJ, through its QE, buys 
more than 100 percent of the increase in the debt. And so the 
BOJ buys JGBs and it buys corporate bonds and it buys ETFs. It 
is all a financial shell game. And it is the poster boy for 
what we should avoid.
    Mr. Pearce. Which, again, gets towards my concern that some 
of what we are doing appears to be a shell game in a lot of 
ways.
    I yield back, Mr. Chairman.
    Chairman Huizenga. The gentleman yields back, with that, 
the Chair recognizes Mr. Heck of Washington for 5 minutes.
    Mr. Heck. Thank you, Mr. Chair. I have question for Dr. 
Johnson, before I ask it, with all due respect, sir, I just 
thought I might point out you referred to Congressman Foster as 
Mr. Foster. He, in fact, has a Ph.D. In theoretical physics 
from--I grant you it is only Harvard, sir, but he likes to 
remind people that he is the sole remaining actually scientist 
in the United States House of Representatives. Point of future 
reference is all, Dr. Johnson.
    Mr. Johnson. It says Mr. Foster in his name tag, so you 
should see if you can have that changed.
    Mr. Heck. Point well taken.
    So, Dr. Johnson, I have been on this committee and in this 
body for almost 4 years now, and I have tried to be an 
unwavering advocate for increased spending on infrastructure to 
not just stimulate the economy but to stimulate growth over a 
long period of time, a little bit lay foundation for increased 
productivity. I have even gone so far as to encourage then 
Chairman Bernanke to consider using their tools to help with 
infrastructure spending by municipalities. He said they didn't 
have the authority. That, despite the fact, by the way, that 
they actually did exactly that when metro was built here 
several decades ago. I also suggested to him that is what they 
were doing with QE in the housing market. He denied that. I 
take a different conclusion out of the net effect of that 
particular activity on the part of the Fed.
    But here is what I am struck by: I try to get Chairman 
Bernanke to do it. I have had this conversation with 
Chairperson Yellen. And I have encouraged all of my colleagues 
to step up to an increased infrastructure spending bill. We did 
the FAST Act, which was very modest, frankly, very modest 
compared to what I think the need is.
    But that was when unemployment was 8 percent. And 
unemployment now is 4.6 percent. And an awful lot of the same 
people that resisted aggressively, increased expenditures on 
infrastructure are--have now come around to be an advocate for 
it.
    And so my question to you, Dr. Johnson is, why would 
increased spending on infrastructure be a bad thing when the 
unemployment rate was 8 percent but a good thing when it is 4.6 
percent? I do not understand that.
    Mr. Johnson. Well, Congressman, I think the main case for 
infrastructure, which I think is physical infrastructure, 
transportation, schools, and the human capital infrastructure, 
which is everything else around the way we train people, I 
think it is hugely important for productivity growth. You know, 
in the parlance of the IMF, you know, it is medium term 
objectives that you should have fiscal policy. I think that is 
exactly what you have been saying.
    Now, there is an additional argument for fiscal policy if 
you think that monetary policy is limited in its effectiveness 
and the economy, the private commercial part of the economy, 
needs some additional help. And I think that was a good 
argument at 10 percent or 8 percent unemployment. That piece of 
the argument, is I think, weaker now. But the medium term 
argument is incredibly strong. In fact, we are, I think, 
agreeing that there are big medium-term issues, and I would 
certainly get at them in this way.
    Now, if the question is alluding, as I think it may be, to 
what President-elect Trump has said about infrastructure and 
what appear to be the plan to materializing, I am not 
confident, Mr. Heck, that that actually is infrastructure 
spending of the kind that you are invisioning and that I just 
stated. I think it may be some different form of tax breaks of 
some kind either for existing infrastructure projects or for 
some other projects that will end up being more expensive and 
will get less effectiveness out of them compared with doing it 
through Congress.
    I would emphasize, though, and I think we are all agreeing 
on this, that fiscal policy infrastructure is responsibility of 
the fiscal authority, which is the Congress in the United 
States acting through the executive branch. It is not the 
responsibility and should not become the responsibility of the 
Federal Reserve.
    I take your point about the metro. I wasn't--I don't know 
how they did that one, but--
    Mr. Heck. What about my--what about my QE?
    Mr. Johnson. So what they do in QE, and this goes back to 
the point--
    Mr. Heck. Was is it not in effect a stimulus of the housing 
market indirectly?
    Mr. Johnson. Yes, Mr. Heck, it was. But this is back to our 
point of violent agreement among ourselves and with Mr. 
Mulvaney. QE1 was targeted at a specific breakdown in the 
mortgage-backed security market. That was hugely important to 
housing, to house prices, and for reasons you all understand, 
the financial sector and the economy. So in that fog of war 
moment, it was a good call. And, yes, it was a specific 
target--
    Mr. Heck. Okay. My point isn't--my point isn't that they 
should embark upon this journey, although I have made that 
point in the past. My point was--and I take from your remarks, 
it was a good idea to increase our investment in infrastructure 
at 8 percent unemployment, it is a good idea to do it at 4.6 
percent if it is done the right way--
    Mr. Johnson. Yes.
    Mr. Heck. --especially with an eye toward long-term growth 
and increased productivity where he can gauge it?
    Mr. Johnson. Absolutely.
    Mr. Heck. Fair enough?
    Mr. Johnson. Yes.
    Mr. Heck. I see I am close to being out of time. I am given 
to believe that we may have a second round. So maybe I will 
have another chance to get into auction here with you all. 
Thank you all for being here very much.
    With that I yield back, Mr. Chair.
    Chairman Huizenga. The gentleman yields back.
    With that, I will recognize Mr. Schweikert of Arizona for 5 
minutes.
    Mr. Schweikert. Thank you, Mr. Chairman.
    One of the problems is a lot of the really interesting 
questions have already been part of the exchange. Can we all 
have an agreement, though, that expansive monetary policy does 
enable those of us who are responsible for fiscal policy, it 
sort of indemnifies us from doing things that are hard, are 
controversial, are sometimes ideologically hard to explain. So 
I am not even asking that. I am just sort of saying it.
    Can I walk through a handful of things? And There is one 
just because Mulvaney and I have talked about. And I am just 
curious. So this one, Dr. Johnson, if we were to talk about 
sort of nonconforming monetary policy that would be within the 
rules of the U.S. Federal Reserve, let's say we will talk 
about, like during the type of QE1, could they have bought the 
lost piece of an MBF securitization instead of buying the 
entire securitization? It is just a quirky idea I have often 
wondered about. Would that have also been a way to change the 
bandwidth of the exposure for investors?
    Mr. Johnson. They are not allowed to take credit risk. And 
then they are only allowed presumably to buy government 
guaranteed securities, which in normal times means treasuries, 
but after Fannie and Freddie were nationalized, that included 
the agency securities. So I think the answer would be if you 
are just talking about, you know, picking and choosing within 
the Fannie and Freddie securitites--
    Mr. Schweikert. Let's say, if Fannie, you know--a 
nationalized Fannie Mae selling--
    Mr. Johnson. Perhaps. But what they did was much smarter 
than that, Congressman. What they did was they bought new 
issues. That was the pipeline that had broken down. And they 
targeted the QE1 on enabling that process to restart. So think 
of it like a kick start or cranking the engine. Right? And that 
I think was a good use. And to do that, you would really be 
buying the entire issue, not picking and choosing within the 
issues--
    Mr. Schweikert. Okay. So one side it would be an approach 
for what is collapsing, the other side would be keeping the 
channel healthy? Or at least keeping it healthy?
    Mr. Johnson. Yes. Ongoing or restarting it.
    Mr. Schweikert. And this may be more for Dr.--is it Levy or 
Levy? If I came to you right now and said, what is our greatest 
exposure for a difficulty that could happen in our markets 
right now? If interest rates start to move upward, simple 
example I can give you is, just the other day I was looking at 
a number of nonpublicly traded REIT's that were paying some 
fairly healthy rates of return. But if you looked at the 
underlying asset, they were varied interest and sensitive, 
tenant sensitive, those things. Are we headed towards a moment 
where the next economic difficulty we see is as interest rates 
are moving away from us, that the cap rate compression that we 
have had now starts to move against them and all of a sudden we 
once again have another great difficulty in parts, whether it 
be commercial real estate market, these nonpublicly traded REIT 
markets, what is our next rate exposure you see on the horizon?
    Mr. Levy. Well, there is certainly a risk, because after 
keeping, rates really, too low for too long and pumping so much 
liquidity into financial markets and encouraging risk taking, 
global portfolio managers base their investments on that 
framework, and now things are going to change and there are 
going to be some losses along the way.
    Now, I would point out that the interest rates have 
increased rather significantly in the last couple of months, 
particularly post election. I would say that is healthy, 
because you actually want rising real interest rates reflecting 
healthier expectations for the future.
    Mr. Schweikert. I guess my concern was just being--our 
brothers and sisters being sort of emotionally prepared that we 
do have a lot of misallocation in the capital, you know, yield 
chasing and some of that is going to have some difficulties as 
the rates move.
    Mr. Levy. And I would say the answer to that is yes. You 
just cannot do what the Fed has done the last 7 years and 
expect there to be no eventual unwind. I think the offset to 
that is if, in fact, we do get economic reforms, raised--not 
just temporarily, but raised potential growth, then there is a 
very, very positive offset.
    Mr. Schweikert. Let's--and we won't have time for this, but 
I am hoping if we get to a second round, we have a discussion 
sort of that is one off from sort of the monetary and those are 
of us who are fixated that there has been a massive 
misallocation of capital not going through its most productive 
allocation.
    But what would you have us do from a fiscal policy that 
would maximize productivity gain? Because I think that is 
something we all agree there is something wrong out there for 
the last decade and our productivity numbers.
    And with that, I yield back, Mr. Chairman.
    Chairman Huizenga. The gentleman yields back.
    With that, we will recognize Mrs. Love of Utah for 5 
minutes.
    Mrs. Love. Thank you. Thank you, Mr. Chairman.
    Thank you, the panel, for being here.
    This has been really just a great, a great panel, and it's 
been--given me quite a bit of insight. So I guess I am just 
going to explain what I have heard and then get your comments 
on what you think, whether you think that this is--if I am 
getting it correctly.
    So one of the comments that was made by Dr. Levy, which I 
think is right on, is a clear explanation, by the Fed, of the 
monetary policies and the factors that have contributed to the 
lower potential growth, weak capital spending, and 
productivity, and structural unemployment would help steer the 
economic policy debate towards the issues that really matter 
for performance. I think that that hits the nail on the head.
    So if I look at where we were at the beginning, 1913, 
versus where we are today, where the Fed was involved in dollar 
stability, low inflation, bank oversight, to 2016 where its 
inflation, full employment, expanded bank holding companies 
oversight, FSOC, you name it, a whole host of responsibilities 
that have been put on the Fed's table responsibilities. We talk 
about the CFPB, we talk about all of these other arms that 
really start to effect the economy and how everything is run. I 
start thinking about what is happening today. And the 
frustrations of the American people today is not really the 
responsibility or--should be reflected towards the Federal 
Reserve. It should be towards Congress.
    If you think about the whole--when we think about what the 
panel is saying and a whole host of things that the Federal 
Reserve is dealing with right now, the fact that this body 
today is made up of mainly Republican--of mostly Republicans, 
also the Senate, and the White House is a reflection upon the 
frustration of the American--that the American people have 
today.
    So I believe that it is not about what the Federal Reserve 
is doing, but it is about what the House of Representatives, 
what Congress is doing altogether. And that we have literally 
said we are not going to take the responsibilities of the 
economy, but we are going to put it on the table in the hands 
of the Federal Reserve. And I think that it is time for us to 
decide what the Federal Reserve is responsible for and what we 
are willing to take responsibility for.
    I am going to give a short example, and then I want you to 
explain, to tell me if I have it right. So if I look at my 
home, and I have a child, for instance, that is sick, that has 
a fever. My job is to go into the cupboard. I grab Tylenol, and 
I decide what the best dosage is for the right age of that 
child and give that child the right dosage. And when I look at 
what the policies of Dodd-Frank and all of these other things, 
the responsibilities the Fed have, I feel at this time right 
now we have literally taken the entire bottle of Tylenol and 
given it to the child, where now we have all sorts of problems 
that we are trying to adjust and we are trying to fix, and it 
is not working.
    So I just want to get your thoughts on that and tell me if 
we are on the right track and what we need to do as a body to 
make sure that we are gaining--we are taking back the reins, to 
what happens, our responsibility to what happens in this 
economy.
    I did quote you, so Dr. Levy, I was wondering if you could 
comment on that?
    Mr. Levy. All I can say is great comments. And I really 
appreciate that. Because I think what is needed when we look at 
the challenges facing the economy--and let me just point out 
that 2007, both the Congressional Budget Office and the Fed 
estimated potential growth to be 2.6. And now the Fed is down 
to 1.8 and the CBO is at 2.0. That is dramatic change.
    Mrs. Love. Right.
    Mr. Levy. So what policymakers need to do is think about 
the challenges and what are the true sources of the economic 
weakness and address them with the correct policy tools and not 
just rely, as it has recently, on the Federal Reserve.
    Mrs. Love. You have a comment--I just wanted to make sure I 
got a comment on both sides.
    Dr. Johnson, do you have a comment on that?
    Mr. Johnson. I think, Mrs. Love, you put the problem well. 
And I agree with Mr. Levy, productivity growth is lower in 
these estimates, and that is not acceptable. You know, I guess 
the good news for your side is you get--you are in charge. 
Right? You have all the branches of government, and you are 
going to make the policies. I am skeptical that you are going 
to have the sorts of positive effects on growth that Mr. Levy 
thinks, but go ahead, do it, and we will be measuring it 
carefully and be evaluating it on that basis.
    I do think, though, you want to be very careful with 
financial stability, because it has been a good question for 
our economy for a long time. You talk about the formation of 
the Federal Reserve, and you should think very carefully what 
you want Congress to be responsible for. I would not--maybe you 
don't want the Fed to do it, fine. You need some responsible 
body--
    Mrs. Love. But there is a balance. There is a right--it is 
getting the right balance?
    Mr. Johnson. Absolutely correct. Yes.
    Mrs. Love. Thank you.
    Chairman Huizenga. The gentlelady's time has expired.
    And at this point, we would like to welcome Congressman 
Hill from Arizona, who is not a regular member of the 
committee, but I am sure--I am sorry. Yes, sorry. I believe I 
said Arizona, but Arkansas. But I would like to thank Mr. Hill. 
It was a conversation that he and I had had that really 
prompted us to put together the panel in this hearing.
    With that in mind, I would welcome you to the subcommittee 
and recognize you for 5 minutes.
    Mr. Hill. I thank the chairman. I appreciate the 
opportunity to be a guest today for the hearing. I appreciate 
the panelists being here.
    And despite my affection for Mr. Schweikert, I am 
completely delighted that I don't live in Arizona.
    Mr. Schweikert. Hey.
    Mr. Hill. I knew that would get your attention.
    I want to start out and ask about--we have had a lot of 
discussion--I appreciate Mr. Mulvaney bringing up the subject 
of nontreasury purchases, the limitations in section 14 on open 
market operations.
    Would it be beneficial for the Congress to amend section 14 
and explicitly restrict the Fed from buying corporate 
securities? It is left open, and in this world of chevron 
deference and lawyers in Washington, I have concerns that open 
market operations could be expanded just by clever lawyering at 
the Fed.
    Dr. Taylor, what is your view on that?
    Mr. Taylor. I think it would be a good idea to clarify. 
There seems to be an opinion that they would find it difficult 
to do now, but I think it would be better to clarify it for the 
reasons you said.
    Mr. Hill. Well, in her testimony, Chair Yellen dodged the 
question here, but then a week later, on September 29, gave a 
speech to the Kansas City Fed where she said, there could be 
benefits to ability to buy either equities or corporate bonds. 
They would have to be weighed carefully. And she said in her 
view, that the Fed does not have the authority to do that 
without Congress changing the law. But if you read a lot of 
legal precedent around the city, I think that could be argued. 
And so that gives me great concern that we would follow these 
other central banks.
    Dr. Plosser, you want to add to that comment?
    Mr. Plosser. I would agree. I think it would be beneficial. 
The Fed, by its nature and history, you know, always prefers to 
have the option and the discretion to do what they think is the 
right thing at the right time, and those intentions are often 
good. But what discretion also does is allow you to do the 
wrong things at the wrong time. And so I agree with Dr. Taylor. 
I believe it would be useful to be more explicit about what the 
Fed can and can't do than leave it to discretion.
    I think the discussion of the Fed buying equities is a 
dangerous one. There are other central banks around the world 
that do it, do it for different reasons, there are 
institutional reasons. The ECB, for example, has to respond to 
17 different governments. So if you confine them to only 
government securities, there is a whole big political debate on 
which country you prefer and which one you don't, and so it 
gets them out of a different set of institutional problems. So 
I think it would be beneficial. I agree.
    Mr. Hill. You have also--in your testimony, you talk about 
during the crisis and the recession, the Fed purchased 
distressed securities under 13(3) and that such actions were a 
form of credit allocation, fiscal policy.
    Dodd-Frank partially addressed the issue of discretionary 
lending under 13(3), but you said you would go further. Could 
you talk about how you would go further?
    Mr. Plosser. Yes. Back in 2009, I first started talking 
about this, is that I think that 13(3), again, was a loophole, 
if you will, or it is a thing you can drive a truck through. It 
is a form of fiscal policy. I don't think the Fed's role is to 
buy distressed securities and bail out individual organizations 
and, yet, 13(3) allowed that.
    Congress did address that by restricting 13(3) to be broad-
based programs that didn't--weren't targeted at any one 
company. But I think that, again, all of us know that there are 
ways to write an action that sort of really is targeting, even 
though it doesn't sound like it is targeted.
    My preference, though is that we really do need what I have 
called a new accord about financial crises and about the role 
that the Fed plays in them, and particularly when it comes to 
purchasing private sector securities, whether it be equities or 
whether it be under 13(3). And that accord, from my mind, is to 
sort of keep the Fed--and I alluded to this in my remarks, keep 
the Fed from engaging in discretionary fiscal policy actions, 
that there needs to be expanding, that is up front, an 
agreement about how such a circumstance would work. And I call 
that a new accord.
    And what that does is, it would work something like the 
following: Suppose there really was a crisis--and we did have 
one. We had a crisis with AIG; and we had a crisis with Bear 
Stearns. In those types of environments, things do happen, and 
you have to make tough decisions. So what I would recommend is 
that the Fed not be given the authority to buy those, 
particularly, distressed securities in a crisis. That is not 
monetary policy.
    What should happen in my view is that there should be an 
agreement in advance that under those circumstances, under a 
crisis like that, it is the fiscal authorities, in this case 
would be the Treasury, let's say, make that decision and 
determine, perhaps in conjunction with the Fed's consultation, 
about what to do. And if that was decided that was appropriate, 
from a fiscal and financial stability point of view, that the 
Fed certainly could be instructed by the Treasury to actually 
conduct an operation on very short notice, but, and here is the 
key, but those securities that were acquired during such an 
emergency would then be swapped by the Treasury for U.S. 
Treasury securities that would be given to the Fed in exchange 
for the private sector securities or distressed securities that 
were actually purchased. That way it becomes clear that that 
action has the responsibility of the fiscal authorities in 
making a fiscal decision, and the Fed would be given the 
treasuries in exchange, and they could go about conducting 
monetary policy as they saw fit.
    Mr. Hill. Thank you. Mr. Chairman.
    Chairman Huizenga. The gentleman's time has expired, and 
let that go for the salient point.
    With that, I would like to recognize the vice chair--I am 
sorry--the ranking member of the committee, Ms. Moore, for 5 
minutes.
    If it is okay with you all, we would be entering into a 
second--second round here.
    Ms. Moore. Thank you for your generosity of your time, 
gentlemen.
    I wanted to ask this during the first round, but my time 
didn't allow it.
    Dr. Taylor, you--in your testimony on page 3, you talk 
about the importance of monetary normalization, and you talked 
about it in the context of the international community. You 
said that unconventional monetary policy, so the near zero 
policy rates have spread internationally. And so you say that 
if United States--if we normalize and have a rules-based 
approach, that this would spread as well. I have a couple of 
questions.
    Number one, do you think it would be a greater possibility 
of kind of gaming the system if people sort of knew that we had 
this rigid policy that wasn't flexible with changes, and what 
makes you think that we can, you know, what evidence do you 
have that if we were to, you know, given that we sort of 
poisoned the well with our monetary policy, should Europe and 
other central banks not have done what we did?
    Mr. Taylor. So I think there is lots of evidence that the 
unusual policies spread, and there is various reasons for that. 
The low interest rates, other central banks are worried about 
their exchange rate, and so they will tend to--
    Ms. Moore. I mean, should they have done that?
    Mr. Taylor. Well, one of the questions is whether they 
overdid it or not. But if we had had, in my view, a more normal 
rules-based predictable policy, the likelihood of that 
diminishes a lot. In a way, the United States is being more 
transparent about its policy, and that leads other countries to 
do the same. So that is what the research says. I talked to 
many of these heads of central banks about it. That is my 
sense, and it would be conducive to a more rules-based 
international monetary system if we had a more rules-based 
monetary policy.
    And so I think there is discussion about that. It is not 
clear how it would work, but that is how I--from my research 
and from talking to many people in central banks around the 
world, that is my sense about--
    Ms. Moore. Your comment on that, Dr. Johnson?
    Mr. Johnson. Well, again, if FOMC decided to follow a rule 
of the kind being proposed, that is fine with me. I don't think 
Congress should be micromanaging, that is the bottom line. In 
terms of--I mean, the U.S. is clearly a leader, thought leader 
among central banks, with whom I have also worked extensively. 
You know, the Europeans have a very difficult set of problems. 
I don't think--and Dr. Plosser talked about, you know, how that 
impacts what we can do and can't do in terms of monetary 
policy.
    I don't think that us changing--going to a more rules-based 
approach would have a big impact. Japan has a long very, very 
deep structural issues. Dr. Levy has talked about those. Again, 
I don't see exact parallels.
    The British have trapped themselves in an extremely bizarre 
and difficult situation, again, very different. So I wouldn't--
I think the discussion which we are having is a very good one 
about the U.S.--what is good for the U.S. economy. I think the 
impact on the rest of the world would be pretty second or third 
order.
    Ms. Moore. I agree.
    Dr. Taylor, I want to ask you another question. You have 
been an--you have been a critic of intervening in markets. So I 
am curious as to what your thoughts are about President-elect 
Trump's intervention in Carrier and now threatening Boeing. Do 
you think that that is--what would your advice to President-
elect Trump be?
    Mr. Taylor. Well, I don't know the details of either of 
those cases. What I would say is that with respect to making 
the U.S. an attractive place to invest and stay here, that is 
the key. And to me, there are opportunities for that, and that 
is regulatory reform and tax reform.
    We talked a few minutes ago of where monetary policy would 
play. I think there is a sense in which if the Fed is viewed as 
some--an organization which will take care of all of our 
problems, interventionists perhaps, and that reduces the chance 
for these reforms, like the regulatory reform and the tax 
reform. So I am quite optimistic now, that especially if you 
get some monetary reform, will move in that direction. And that 
is really what I would argue we should do in these cases.
    Ms. Moore. Versus interfering in that way?
    Your thought on that, Dr. Johnson?
    Mr. Johnson. Well, if we apply Dr. Levy's sensible 
principles that, you know, generating uncertainty and if you 
confuse about what is going happen is a problem, then you 
shouldn't, up should not absolutely use presidential authority 
to mess around with individual companies.
    Ms. Moore. And so, Dr. Taylor, I do want you to be on the 
record saying that you don't think we should do that.
    Mr. Taylor. Well, I say what we should do is make this 
country an attractive place to invest. That is what we should 
do. How you do that is a question. I think it is regulatory 
reform. I think it is tax reform. I think it is a lot of 
reforms. You mentioned education, there are a lot of things in 
education to do. All those things make our country more 
attractive place to invest, more attractive place for job 
creation and for higher incomes and productivity. I think it is 
pretty straightforward. Hard to do, but that is what we should 
do.
    Ms. Moore. Thank you.
    Chairman Huizenga. The gentlelady's time has expired. So at 
this point I will recognize myself for 5 minutes, and I do--if 
I have time let, I want to come back to Dr. Johnson's 
discussion of the Fed rule.
    Dr. Levy, I want to start with you and also hit Dr. Taylor. 
Your statement notes that, ``The Fed's fully discretionary 
approach in conducting policy highlighted by its ever-changing 
explanations for delaying rate increases adds confusion, and it 
has created a very unhealthy relationship with the financial 
markets.''
    In light of your statement, Dr. Levy, can you please share 
your opinion about whether the Fed could do a better job by 
referencing a more principled policy strategy and providing a 
more accessible explanation of how the FOMC decisions depend on 
data rather telling us in plain English what data matter, and 
why they, and how they matter, and would measures like these 
help us safeguard monetary policy independence and help goods 
and services, which obviously includes labor as well, find 
their most productive employment?
    Mr. Levy. The Fed has created an extremely unhealthy 
relationship with financial markets. It not only bases its 
actions but also bases what it says on how it thinks the market 
is going to respond. And the markets respond and think about 
what the Fed is going to say. And when you get to the point 
about data dependence, you come in and you see another Fed 
member gave a speech on something, and they said they are data 
dependent. You say, what is that? And the honest answer is it 
is anything they want it to mean. And that is not the right way 
to conduct policy.
    So I think what the Fed should do is move towards a 
flexible rules-based monetary policy framework and, in 
particular, de-emphasize short-term financial fluctuations and 
economic fluctuations. That comes. That comes with the 
territory. Stay away from that, and move--and look to the long 
run and base policies on the long run. And absolutely change 
its communications and its official policy statements toward 
achieving its long-run objectives and away from day-to-day 
fluctuations in the markets that it can't do anything about and 
has no impact on the economy at all.
    Chairman Huizenga. Dr. Taylor, you care to comment on that?
    Mr. Taylor. Well, basically, I agree. I couldn't put it any 
better than what--he says it is flexible rules-based. I think 
rules-based should be flexible, just to clarify.
    Chairman Huizenga. Well, I do too, which means maybe we 
weren't as clear in format as we would have liked. But I at one 
point in the hearing dubbed it the Yellen rule. They can set 
whatever, you know, guideline that they would like. It is just 
having some sort of guidepost to reflect upon. And I guess that 
is--Dr. Johnson, your quote that I wrote down here, roughly 
is--I guess it wouldn't be a quote--roughly I wrote down, if 
the Fed cares to adopt a rule, fine, but Congress should not 
mandate a rigid rule. And I don't think I would disagree with 
that. I don't think that the rest of the panel would disagree 
with that, but I just want to give you a moment to address that 
if you would like to.
    And then I do want to very quickly, in my remaining time, 
Dr. Levy had answered this, but I would like to hear about the 
politicization of the Fed, and he is addressed that a couple of 
times. So go ahead.
    Mr. Johnson. So I like what Dr. Plosser is saying on this 
issue, and he has been a member of the FOMC, and I haven't. 
Flexible rules-based is a little bit of an oxymoron but not 
really. And the Fed has actually improved its communication in 
transparency a lot since, for example, 1990. The second half of 
the 1990s Ben Bernanke did a lot when he was also chairman. I 
think it is really hard to legislate that, Mr. Chairman. And I 
worry that it goes with all the best intentions, it will become 
micromanagement and too much control.
    I think you want to have this kind of discussion. This is 
very helpful. Put good people on the board of the Fed and the 
FOMC and let them figure out how to improve communication and 
transparency, which is what--
    Chairman Huizenga. Will they do that without a legislative 
nudge? That is the question that I have, and I haven't been 
convinced of that.
    Mr. Johnson. I think--you get--I think the Republican 
administration and Congress will appoint most of the members of 
the board of governors, and we will see what happens to the 
FOMC over the next number of years. But I expect you will--
    Chairman Huizenga. As we have learned, elections are not 
predictable, and there are changes. And I want to make sure 
that what is belt and suspenders in one administration is belt 
and suspenders on another. And that is really the purpose.
    So, Dr. Taylor, real quickly, and Dr. Plosser, you haven't 
had a chance to discuss the politicization of the Fed.
    Mr. Taylor. You know, I think this idea that the Fed sets 
its strategy, its rule, that is its job. It communicates what 
it is explicitly. If it deviates from it, it says why. Is it 
done through hearings, it creates a much better process. And, 
you know, individuals can make a difference, but this is beyond 
individuals. We have had over 100 years of experience, and it 
would be a great value in terms of how the Fed operates, how 
the Fed operates with its staff, with its researchers and the 
decisionmakers and how it discusses, not just to you but the 
American people generally about what it is doing. It would be 
far better to have a description of what it does, and I don't 
think it is as hard as people think it will be.
    Chairman Huizenga. Okay.
    And my time has expired.
    With that, I recognize the gentleman from Washington, Mr. 
Heck, for 5 minutes.
    Mr. Heck. Thank you, Mr. Chairman.
    This is for any of you. It seems as though most, if not all 
of you argued against using unconventional monetary policy in 
the future, presumably to rely more on the traditional means, 
the overnight lending rate or whatever.
    And I am wondering if you believe as well that that implies 
that the Fed ought to have a higher inflation target? And the 
reason that I ask that is that the Fed's current inflation 
target is about 3 percent and, yet, in fact, in past 
recessions--and we should all acknowledge that God has not 
outlawed the business cycle. We are going to have another 
recession at some point. The Fed has typically cut by more than 
4 percent.
    So do you believe we should have a higher inflation target 
so that the Fed has a bigger buffer so that they can avoid 
using QE, which you seem to say is a bad thing to do? Anybody.
    Mr. Taylor. Well, I just--I don't think the Fed should 
raise the inflation target. There is something there to be said 
for keeping it.
    One thing it would probably prolong these unusual policies, 
but it is fine. Sometimes we--since this was instituted, it is 
sometimes taken as a reason to gun things just because the 
inflation rate is 1.7 rather than 2, so that should be looked 
at to some extent. These are--inflation rates that are measured 
with some error. But I see no reason to be raising the 
inflation rate target.
    Mr. Heck. So what leads you to conclude that they won't 
need the same latitude for reduction in interest rates that 
they have typically utilized to combat the recession?
    Mr. Taylor. So one of the rationales for raising--that 
people make, for raising the inflation rate is that for some 
reason the equilibrium low interest rate has changed, declined, 
and so there is less room for policy to move it down. I think 
that is quite questionable. I know there are a lot of people 
who think that. If you look at the Fed's forecast, they have 
ratcheted that down by a percentage point over the last 3 
years.
    When I look at the U.S. and the world, I don't see evidence 
for that. And, in fact, I think to some extent the backup in 
long-term rates over the last month or so is some evidence 
there is not just simply a low equilibrium interest rate as the 
Fed describes it. So I don't think there are reasons for that. 
And also, we have had much experience about how to manage 
monetary policy at this 2 percent inflation target. There is 
also an international aspect. Most of the countries are in that 
same region. And so with respect to stability of the overall 
exchange rate system, it is a subvalue to have a common 
inflation target. If anything, maybe in the future when we get 
better measures, it should be lower. But I think it is fine 
right now.
    Mr. Heck. Dr. Johnson?
    Mr. Johnson. Mr. Heck, I agree we shouldn't lower the 
inflation target. I think it is 2 percent, roughly speaking.
    But, I think you hit a really important nail on the head. 
It goes to what Mr. Huizenga was saying, which is about, you 
know, what should Congress decide and what should be in 
legislation? So if monetary policy is gong to run out of 
bullets or conventional monetary policy is going to hit this 
zero interest bound on a regular basis, which is what you are 
saying, and I agree, and if we agree that unconventional 
monetary policy is only appealing in very, very specific 
circumstances and probably isn't much use over a regular 
business cycle, then what should we be doing when the economy 
turns down by that much? Well, I think--thinking about the 
legitimate--and so Dr. Plosser is calling for a new accord. I 
think a new accord broadly constructed would include Congress 
thinking about the use of fiscal policy for countercyclical 
purposes.
    And I would remind you, Mr. Chairman, that in early 2008, 
President George W. Bush proposed, and there was a lot of 
Republican support for and Congress passed, a tax cut for 
countercyclical purposes. Early 2008 right? So before Bear 
Stearns. That was a good idea. Well done.
    That was a good idea, use of countercyclical fiscal policy, 
in a relatively moderate way. Yes, in retrospect, perhaps too 
small. But it was a good idea--I mean, we have somehow 
developed or you developed this aversion to any countercyclical 
use of fiscal policy. I don't think that is a good idea. I 
think that there is a measured use for it, and that is where 
Mr. Heck is going with his question. Don't rely on the central 
bank to save the day, because they will not be able to, 
necessarily, next time.
    Mr. Heck. So my favorite personal characteristic is 
humility. I don't have much time left. But I am wondering if 
any of you would be willing to put yours on display by 
acknowledging that you argued in advance of the use of 
quantitative easing, or during it, that it would lead to 
inflation, which we have not yet experienced. And if so, if you 
are willing to admit it, if you would also tell me why you were 
wrong.
    Dr. Levy, are you admitting you are wrong, sir?
    Mr. Levy. Yes. And--so, typically, when you move to QE and 
there is tremendous liquidity and you leave rates too low too 
long, it generates excess demand in the economy, and that has 
not happened. Where I was wrong is the Fed's excessive ease did 
not translate into excessive bank lending and acceleration of 
nominal GDP relative to productive capacity that would have 
boosted wages and inflation.
    Having said that, beginning with QE3 in the summer of 2012, 
this just was clear to me, even if inflation didn't rise, that 
the distortions created by the Fed's QE and forward guidance 
were going to be very costly, and I think we are going to bear 
out those costs.
    Back to your earlier point on the flexibility of monetary 
policy, should there be a recession I don't--
    Mr. Heck. Should there be? Sir, don't you mean when there 
is?
    Mr. Levy. There will be. I don't think you would be having 
those same concerns now if, over the last couple of years, as 
the economyis growing along its potential path, that the Fed 
would have normalized rates. And so as Dr. Taylor said, if the 
Fed had normalized, history suggests it would have had no 
negative impact on the economy, and real interest rates would 
be higher and the Fed would be having that much more 
flexibility than it is now perceived to have from the vantage 
point of where our rates are now.
    Mr. Heck. I would acknowledge hindsight is a wonderful 
thing in this regard and all regards including our forecast 
about the net impact of quantitative easing.
    Chairman Huizenga. The gentleman's time has expired.
    I would love to hear how regulation might have hampered 
that excess lending with that equation, but I do need to move 
on to Mr. Schweikert from Arizona, who is recognized for 5 
minutes.
    Mr. Schweikert. Thank you, Mr. Chairman.
    You know, it is a complex ecosystem, but let's stay a 
little bit on this theme.
    And, Mr. Chairman, thank you for tolerating. Sometimes my 
questions get a little off track, but I am trying to sort of 
understand some things.
    If I was sitting in your lecture halls 10 years ago, and 
during that lecture the discussion was we are going to 
substantially, dramatically, increase monetary supply, 
liquidity in the United States but all over the world, what 
would you have put up on the board as saying, and this is our 
prediction of what will happen to productivity gains because of 
new equipment, new--and why has not--what I would have assumed 
would have been obvious, why hasn't it happened? What has 
happened--and if we had had this discussion 10 years ago, what 
did we get right in our predictions and what have we gotten 
wrong, and what is the solution to productivity? Is it purely 
on the fiscal side and monetary should not even--even put it 
into its calculus? Anyone willing to play on this subject?
    Mr. Plosser. So let me offer at least one reaction. And 
that is, the first thing to recognize is that monetary policy 
is not a solution to any form of productivity problem.
    Mr. Schweikert. Okay. And you actually beat me to my punch 
line, but I was going to wait to the 5-minute mark for that.
    Mr. Plosser. I am sorry.
    Chairman Huizenga. Can you pull your mike a little closer?
    Mr. Plosser. Yes. And I think it is a mistake for the 
public or Congress or anyone else to believe that putting that 
in the hands of central bank is the right thing to do.
    Now, economists really don't understand a whole lot about 
the evolution of productivity. It is not something that we know 
much about. We don't predict it very well. We know some of its 
determinants, but at the end of the day, the long run health of 
the economy, and our ability to gradually continually increase 
our standards of living, is all about productivity. But nothing 
else really matters very much at the end of the day.
    Mr. Schweikert. And, look, this one should be nonpartisan, 
but there is something wrong in the formulas we all went to 
school under. If I put this much money into education; if I put 
this much money into tools and equipment; if I put this much 
money in lending capital for business, plants and equipment, 
you will get this type of productivity gain. And now we are 
living in a world for several years now where lots of 
liquidity, lots of money has actually gone into those, and I am 
not seeing it. So what did we get wrong?
    Mr. Plosser. Putting money through a central bank doesn't 
solve the problem. The productivity is generated by how that 
money gets used at the end of the day.
    Mr. Schweikert. Okay. So is the formula and the amount of 
liquidity that central bank expansionary policy that cash ended 
up on money center banks' books buying--
    Mr. Plosser. So this--
    Mr. Schweikert. I am sorry.
    Mr. Plosser. I am sorry. So this goes back to the previous 
question about why we haven't had inflation. I think what many 
economists, myself included, were wrong about, in part, had to 
do with a lot of the money--I will call it money, but that is 
not really what it is. A lot of the reserves that were created 
through quantitative easing are still in the banking system.
    Dr. Levy said they haven't been spread out in the economy, 
which is actually turn them into money and then turn them into 
inflation.
    Mr. Schweikert. So if I were even to look at banking 
sectors and a couple of other sectors and take a look at what 
we would all around here refer to as sort of this tier one, or 
Boswell compliant capital, a lot of that you might have, if you 
could do the formula backwards, may have come from the 
quantitative easing?
    Mr. Plosser. Right. So I think quantity easing and low 
interest rates did two things that were not terribly helpful. 
One is they led to what I would describe as a lot of financial 
re-engineering, companies buying back debt, or buying back 
stocks, or taking a form of leverage. It didn't get used in the 
usual form of lending and productive capacity.
    Mr. Schweikert. Solicitation of the entire panel. So if I 
came to you and said, all right, productivity gain is important 
for my friends on the left, for particularly those on the 
right, whether we are going to be able to afford our social 
contracts, all the other bells and whistles that society wants, 
but it is going to come from fiscal policy or from types of 
fiscal policy where we create barriers for growth and we need 
to stop doing it, more rational, everything from taxes, from 
regulatory system, and the interplay between those, and we have 
to stop thinking somehow the Federal Reserve is going to bail 
out our failure to act, am I speaking heresy, or do we sort of 
from all sides, do we agree that it is fair?
    Mr. Taylor. So we teach, I think all of us, the 
productivity growth comes from investment and from technology. 
You know, as a famous formula tells us that.
    And right now, if you look at our low productivity growth, 
it is, you know, less than half a percent for the last 5 years. 
We also see very low capital accumulation, and we also see very 
low so-called total factor productivity. So those are the 
reasons. And how do you get more private investment? I think it 
is just regulatory reform. It is the tax reform.
    Mr. Schweikert. Okay. If the chairman would allow me, I 
want to hear--
    Chairman Huizenga. Very quickly.
    Mr. Levy. So as I pointed out, the Fed has very 
successfully lowered bond yields and the real cost to capital. 
Why hasn't that stimulated more capital spending that has been 
the weak link in the economic expansion and productivity? Why 
haven't businesses responded to the lower cost to capital? And 
survey suggests businesses' biggest concerns is taxes, 
regulation, and the like.
    And once again, I think it gets to the point where we need 
to address those concerns with the right policy tools rather 
than more monetary ease, which the Fed's model tells us it 
should do.
    Mr. Schweikert. Mr. Chairman, thank you for your patience. 
I guess the theme I was working on in many ways we can build a 
model that demonstrates that there is a massive, massive 
misallocation of capital, and it was arrogant of us to somehow 
think it was going to go where we all wanted it to go, and that 
at some point those of us who do fiscal policy need to do the 
hard things.
    We need to do the tax reform. We need to do the regulatory 
reform. And some of us, I think--I believe technology, whether 
it be the super computer we carry in our pocket, we could have 
a revolution on how we regulate in a more dramatically 
effective, less expensive, rational model, and I am terrified I 
don't hear enough discussion about it.
    So with that, I yield back.
    Chairman Huizenga. The gentleman's time has expired.
    With that, the Chair will recognize Mrs. Love, of Utah, for 
5 minutes.
    Mrs. Love. Thank you. What I failed to mention in my 
Tylenol analogy is that, you know, when you give your child way 
too much, you end up hurting parts of the body that had nothing 
to do with the fever to begin with.
    So I would actually say, in other words, that when the 
Federal Reserve ventures out of monetary policy, and they 
expand into regulatory policies and practices, they actually 
hurt parts of the financial world that had nothing to do with 
financial crisis, which is some of the examples that we have 
seen.
    I actually wanted to go and expand upon what I was talking 
about earlier in the Federal ReserveAct and the amended 
Humphrey-Hawkins to include full employment.
    What, in your opinion, have we gained from that amendment?
    I haven't spoken to--I haven't asked your opinion, Dr. 
Plosser, if you wouldn't mind.
    Mr. Plosser. I am not sure we have gained a whole lot. I 
think there is no other central bank in the world that has a 
mandate like that. Many of them have inflation targeting 
mandates. Many of them have article mandates where it puts 
inflation first then says, well, if inflation is okay, you can 
sort of do some other things that help the economy. I think 
what we have done, unfortunately, is opened the door for asking 
the Fed or expecting the Fed to do all sorts of things that it 
is not particularly suitable to do.
    And my comments, remarks, I made--and they seem to sort of 
want to take responsibility for everything from real wage 
growth to participation rates, to how many part-time workers we 
have, all sorts of things that monetary policy just really 
can't do. And so the whole thrust of my argument is that by 
narrowing the things we asked them to do, the easier it is to 
hold them accountable for whether they are successful or not.
    Mrs. Love. And I would think--
    Mr. Plosser. --it has to be you don't ask them to do the 
things they can't do.
    Mrs. Love. Yes. And it would also be easier for us not to 
have look at every aspect and manage the thing that they do 
also.
    Do you have a comment with that, Dr. Johnson?
    Mr. Johnson. Congresswoman--
    Mrs. Love. In terms of what we have gained. In your opinion 
what we have gained from that.
    Mr. Johnson. Sure. Sure. Look, I think the legitimacy of 
our government institutions is really important, for whom does 
the Fed work and how do you communicate that? I think we 
mustn't lose track of that. It has taken a beating probably 
through their own, I think, inattention to financial regulatory 
issue, precrisis, pre-2007, 2008.
    And, you know, I think if you remove the employment 
mandate, it would be misunderstood--that would be--you know, I 
agree other central banks formulate this somewhat differently, 
but I think it would be misunderstood by the American people, 
and that would not be my recommendation. But, you know, that is 
your business.
    You know, what is the problem you were trying to fix? On 
Monday, I was with Chairman Volcker at an event that was 
organized by the Volcker alliance. And I was reminded by his 
leadership and his ability with his colleagues to bring down 
inflation. It was a very bad problem when he came in. And 
Chairman Volcker, with others of the Federal Reserve, really 
put the country on the path to what was then an impressive 
economic recovery. And I don't think it was anything in his 
ability to do that job, which is an incredibly hard job with a 
lot of political pressure.
    I don't think the Humphrey-Hawkins amendment made it harder 
for him to do that job. So I don't think--I think the problem 
is, actually, what you said, you know, what is the nature of a 
financial system, how unstable is it, and what we are going to 
go about that? That is a good question. Should the Fed be on 
the job for that? Mr. Volcker, actually, has some other ideas. 
You might want to look at those. I really recommend the work 
done by the Volcker alliance. That is a really good question, 
the financial stability part.
    The Humphrey-Hawkins part, I really would not recommend 
that you repeal that. But, you know, again, you are in charge, 
and if you want to do that--
    Mrs. Love. I just asked what we gained from it, and I 
haven't heard any real--
    Mr. Johnson. Legitimacy. Legitimacy.
    Mrs. Love. --yes, legitimacy on what we have actually gain 
from that. I mean, we can sit there and say, hey, well, I 
wouldn't remove it for fear that we would something happen. But 
I haven't heard any example of what we have actually gained 
from that--from that amended to include full employment.
    Anyway, I just have one more--well, I don't know if I have 
enough time to ask one more question.
    But some of you mentioned that the Fed continued to expand 
its role in systemic regulation and credit allocation. In your 
opinion, Dr. Levy, very quickly, do you think that should make 
us worry about its ability to produce sound monetary policy?
    Mr. Levy. Yes, in general, because this is just an--by 
getting into credit allocation and expanding its scope, it is 
just move monetary policy beyond where it becomes capable, and 
it only generates, you know, distortions in economic and 
financial behavior.
    Mrs. Love. Thank you. Great panel today. Thank you. Thank 
you.
    Chairman Huizenga. And, certainly--well, last but certainly 
not least, we have Mr. Hill from Arkansas who will be 
recognized for 5 minutes.
    Mr. Hill. I thank the chairman. Thanks again to the panel. 
Good discussion about the fact that we have $4 trillion on the 
Fed's balance sheet up from 8- or 900 billion before the crisis 
and yet we don't seem to show much for it. As I have said to 
Chair Yellen before, with deficit spending, with a $4 trillion 
Fed balance sheet, shouldn't we be in some sort of Keynesian 
Nirvana of economic, which we are obviously not.
    In my view, it is the fundamental issue is that not since 
the 1930s have we seen a money multiplier rate at 4, at this 
low, low level, and I think it speaks to--I mean Eccles in the 
1930s called it ``pushing on a string,'' and everybody 
understands that, but it hasn't been lower since say 1935 than 
it is today, period, full stop.
    And so, Dr. Levy, I loved your testimony, and it seems to 
me that the reason is nonmonetary policy structural 
impediments, which we never get an answer to when the 
administration come and testifies. Secretary Lu, zero; Chair 
Yellen, zero on this topic. They will not admit explicitly that 
there are major nonmonetary policy structural impediments such 
as the fact that operational and credit risk has been 
completely mangled by Dodd-Frank, that there is just plain fear 
on the part of market participants, whether they are small 
business people trying to comply with Department of Labor new 
rules or implementing the Affordable Care Act or maintaining 
limits on their employee to comply with avoiding the Affordable 
Care Act, that their staff, in my judgment, is misdirected from 
productive functions to compliance oriented functions.
    And finally, that Dodd-Frank, I think, has made all the 
institutions sort of aligned in a pro-cyclical sort of way 
instead of allowing diversity in risk parameters among the 
activities of our banking institution. So what, in your view, 
and be specific, would get our multiplier up?
    It took 30 years or more for the multiplier to rebound from 
the 1930 depression, a long time, but it fell off a cliff from 
8 or 9 in 2007, straight to the bottom. It has never moved 
since we started all this stimulus.
    So Dr. Johnson, what, in your view, what is the single 
biggest thing we can do in the government to stimulate a faster 
expansion of the multiplier?
    Mr. Johnson. Great question, Mr. Hill, and you know, and I 
don't disagree with the formulation, although it is not exactly 
the standard economic version. I think we focus on the 
productivity growth and the money multiplier, the monetary 
policy will adapt to be consistent with that. Look, I am a 
skeptic with regard to the regulatory impediments, but you 
know--
    Mr. Hill. Why? Why? Give me one reason why.
    Mr. Johnson. Because I spent a long time studying that 
question, that issue, and those measures around the world, and 
I don't see that--
    Mr. Hill. So you believe that banks are lending more and 
have higher productivity, and credit is getting to consumer and 
businesses better today--
    Mr. Johnson. No, sir.
    Mr. Hill. --than it was in 2005?
    Mr. Johnson. No, sir. Can I finish answering the question?
    Mr. Hill. Of course.
    Mr. Johnson. No. Look, we had a huge financial crisis, Mr. 
Hill, and I think if we are looking at medium term, longer term 
growth, the most important thing is avoid having another crisis 
like that, right. So that was the goal of Dodd-Frank, you don't 
like it, I understand that, you are going to repeal and replace 
it, I understand that. Let's see what happens. I am very 
worried. I am very worried about that. But on the regulatory 
pieces, it is going to be fascinating. I am just watching this 
from the side, and I--you know, I wish you well because I want 
good things for the American economy, but I think the story 
that you have, that narrative that you are going to remove 
those regulatory impediments and very good things will happen 
because the impediments were the problem, I am skeptical. I am 
not disagreeing with--
    Mr. Hill. Okay. I will put you down as--
    Mr. Johnson. Sorry.
    Mr. Hill. Excuse me, it is my time. I will put you down as 
a doubter on regulatory. How about tax reform?
    Mr. Johnson. I have testified to this Congress a number of 
occasions in favor of various forms of tax reform, and I think 
if you can find ways to simplify the corporate tax code, remove 
a lot of the special treatments and so on, that could be 
extremely helpful. I am in favor of lowering taxes, absolutely, 
on the lowest paid Americans. I don't see why anybody earning 
under $50,000 a years pays any tax, and I am including Social 
Security contribution.
    So yes, I am all in favor of that, but be careful with 
those projections, the dynamic scoring that says it won't 
impact the budget deficit, because it will, and I think you 
want to be cognizant of the impact on the budget deficit, which 
I know you talk about a lot, and so please really take that 
seriously because otherwise the debt numbers the next time we 
come back here are going to be a lot higher.
    Mr. Hill. Ten seconds, somebody else want to tackle that? 
Dr. Levy.
    Mr. Levy. Yes. Okay. I think if you were to get rid of a 
lot of the micro-regulations in Dodd-Frank, banks are sitting 
on trillions in excess reserves that would increase banks' 
willingness to lend, and you would see the biggest increases 
among small- and medium-sized banks and a lot of their lending 
is to medium- and small-sized businesses that generate a lot of 
jobs.
    Okay. But that is on the financial side. On the 
nonfinancial side, tax reform, and I emphasize reform and not 
just increase deficit spending, corporate tax reform that lifts 
the gray cloud off of corporations, simplification, individual 
income tax cuts, but don't go overboard, and the third point is 
normalize interest rates. You raise interest rates that reduces 
the demand for money that increases velocity, so what you--what 
I am really talking about here is resetting monetary policy but 
also resetting fiscal and regulatory policies in a way that I 
think what has happened over the last, I don't know how many 
years, these inhibitions to growth have constrained both 
aggregate supply and aggregate demand.
    Let's reduce those inhibitions through wise policies, both 
within the financial system so that banks are putting to work 
the excess reserves and on the nonfinancial system so that 
businesses--and once again, if you look at economic performance 
so far this expansion, consumption has grown at a fine pace, so 
has housing. The weakness is capital spending, as Dr. Taylor 
said, the capital stock net of depreciation has been declining, 
this means not just lower capital ratios relative to labor but 
there is less training of labor of new capital. You really need 
this kind of regime change, and then you are going to get the 
multipliers moving back up.
    Maybe the reason why monetary policy has worked is because 
it hasn't worked. I would love to see the regime changes that 
really force monetary policy to normalize.
    Chairman Huizenga. I think therein lies our--we have done 
one thing here. We have successfully bent time; therefore, the 
last 10 seconds. So I do deeply appreciate the time invested by 
our panel and by our members on this very important issue, and 
I would look forward to continuing the conversation.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And with that, the hearing is adjourned.
    [Whereupon, at 12:13 p.m., the hearing was adjourned.]







                            A P P E N D I X



                            December 7, 2016






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