[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
FED OVERSIGHT: LACK OF TRANSPARENCY
AND ACCOUNTABILITY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
JULY 14, 2015
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-41
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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 Oversight and Investigations
SEAN P. DUFFY, Wisconsin, Chairman
MICHAEL G. FITZPATRICK, AL GREEN, Texas, Ranking Member
Pennsylvania, Vice Chairman MICHAEL E. CAPUANO, Massachusetts
PETER T. KING, New York EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina KEITH ELLISON, Minnesota
ROBERT HURT, Virginia JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina DENNY HECK, Washington
RANDY HULTGREN, Illinois KYRSTEN SINEMA, Arizona
ANN WAGNER, Missouri JUAN VARGAS, California
SCOTT TIPTON, Colorado
BRUCE POLIQUIN, Maine
FRENCH HILL, Arkansas
C O N T E N T S
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Page
Hearing held on:
July 14, 2015................................................ 1
Appendix:
July 14, 2015................................................ 33
WITNESSES
Tuesday, July 14, 2015
Calabria, Mark A., Director, Financial Regulation Studies, Cato
Institute...................................................... 4
Kupiec, Paul H., Resident Scholar, American Enterprise Institute. 6
Rivlin, Hon. Alice M., Senior Fellow, Economic Studies, Brookings
Institution.................................................... 9
Taylor, John B., Mary and Robert Raymond Professor of Economics,
Stanford University............................................ 8
APPENDIX
Prepared statements:
Calabria, Mark A............................................. 34
Kupiec, Paul H............................................... 47
Rivlin, Hon. Alice M......................................... 62
Taylor, John B............................................... 65
FED OVERSIGHT: LACK OF TRANSPARENCY
AND ACCOUNTABILITY
----------
Tuesday, July 14, 2015
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Sean P. Duffy
[chairman of the subcommittee] presiding.
Members present: Representatives Duffy, Fitzpatrick, Hurt,
Fincher, Mulvaney, Hultgren, Tipton, Poliquin, Hill; Green,
Cleaver, Beatty, Heck, Sinema, and Vargas.
Ex officio present: Representative Hensarling.
Also present: Representative Love.
Chairman Duffy. The Oversight and Investigations
Subcommittee will come to order. The title of today's
subcommittee hearing is, ``Fed Oversight: Lack of Transparency
and Accountability.''
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Also, without objection, members of the full Financial
Services Committee who are not members of this subcommittee may
participate in today's hearing for the purposes of making an
opening statement and questioning witnesses.
The Chair now recognizes himself for 3 minutes for an
opening statement.
Since its creation over 100 years ago, the scope and
authority of the Federal Reserve has grown exponentially.
Following the 2008 financial crisis, the Dodd-Frank Act
dramatically expanded the Fed's reach into the economy. Dodd-
Frank granted the Fed the authority to set new capital
liquidity standards, conduct stress tests, and regulate
designated systemically important foreign and domestic firms
that pose a threat to U.S. financial stability. These
designations are determined by the Financial Stability
Oversight Council, or FSOC, on which the Fed Chair sits.
While these new powers alone are a significant increase in
the Fed's purview, the Fed also serves as a primary U.S.
representative on the Financial Stability Board, the Basel
Committee on Banking Supervision, and the International
Association of Insurance Supervisors. Some market participants
have expressed concern that the Fed may be showing deference to
international regulatory preference rather than properly
representing American interests.
For this reason and others, I introduced H.R. 2141, the
International Insurance Standards Transparency and Policyholder
Protection Act of 2015, and we are looking for cosponsors if
any Dems want to join, Mr. Green. This bill will establish a
much-needed framework for congressional oversight and
stakeholder input while the Fed and others engage in
international regulatory negotiations.
While the Fed's purview and power continues to grow,
opacity reigns supreme within its walls. It is a fraternity
where silence is golden. And no one, not even Congress, is
allowed to ask questions. This is true not only of how it
conducts monetary policy, but also of its internal processes.
The Fed's clamor for independence is the underpinning for
its argument for circumventing any congressional
accountability. Markets are left in the dark as much as
Congress--unless, that is, you are one of the lucky, well-
capitalized or well-connected firms that can afford non-public
information from the black box that is the Fed.
This committee worked tirelessly to investigate a 2012 leak
of confidential FOMC information by one such Fed insider. That
information was disseminated by Medley Global Advisors to their
clients, which include some of the world's top hedge funds,
institutional investors, and asset managers. And yet, 3 years
later, following 3 internal investigations by the Fed's own
General Counsel and the IG, and countless letters from
Congress, we still don't have any answers.
While we will hear tomorrow from Chair Yellen on this and
other matters, we are looking forward to hearing from our panel
of distinguished witnesses today on this problematic epidemic
culture of opacity at the Fed.
With that, I yield 5 minutes to the ranking member of the
subcommittee, Mr. Green from Texas.
Mr. Green. Thank you, Mr. Chairman. I thank the witnesses
for appearing as well. And I am honored to have an opportunity
to hopefully ask some questions that will give us all some
additional insight.
Having perused the legislation and perused materials
associated with this hearing, I have come to the conclusion
that this hearing is really less about the auditing of the
operations of the Fed and more about monitoring the
deliberations of the Fed, because the Fed is currently audited.
And I will introduce information into the record to show that
the operations of the Fed are audited. There is no question
that the Fed is audited. The question is, should their
deliberations be monitored?
Having been a part of the judiciary for a number of years,
I have come to appreciate deliberations that are held with a
degree of privacy. When jurors deliberate, we don't allow the
cameras in the room, we don't allow parties who are not
associated with the jury to be in that room. Deliberations are
important. You can get candid conversation, candid commentary
when you don't have a third party in the room. Deliberations
are important. We go into executive sessions to have
deliberations so that we can speak candidly about issues. This
is really about the deliberations of the Fed.
It is also more about the superintendency of the Fed than
the transparency of the Fed, the superintendency in the sense
that there seems to be a desire to manage what the Fed does. We
have oversight. We are not overseers of the Fed. And we should
exercise our oversight authority. I fully support oversight of
the Fed. But I don't think we want Congress to oversee the Fed.
I think it would be a mistake of the highest magnitude to allow
what we do here to infect the Fed.
We can barely make decisions. There is great stagnation.
And there is a lot of politicization of what we do. Do we
really want to politicize the Fed by injecting the decisions of
Congress into their deliberations?
I think also that as we go through this, it is going to be
important for us to recognize that Congress has put the Fed in
the position that it is in. The Fed has served us well. And at
some point, the independence yielding to the interference can
become outright meddling. Do we want to meddle in the
deliberations of the Fed? I think not.
Now, with reference to the leaks, the Department of Justice
is investigating, and the Department of Justice has the tools
to perform a proper investigation. The Department of Justice
has indicated a desire to complete this investigation. I
support a thorough investigation of these leaks, but I don't
want this investigation done by Congress to the extent that we
encroach upon what the DOJ is doing and to the extent that we
may, in some way, create a climate such that the DOJ won't be
able to perform its duties effectively. The DOJ has indicated
that it would be prudent to withhold certain testimony until it
has had an opportunity to complete its investigation.
I want the investigation done. I support what the DOJ is
doing. But I don't want to find ourselves in the circumstance
that we have with the CFPB, where Congress is taking the lead
on an investigation and where we don't have all of the due
process in place that should be accorded people who are being
investigated.
I look forward to working with the subcommittee chairman.
And if he can craft a piece of legislation that he and I can
agree upon, of course I will sign on to it.
I yield back.
Chairman Duffy. The gentleman yields back. I look forward
to that.
The Chair now recognizes the the vice chairman of this
subcommittee, the gentleman from Pennsylvania, Mr. Fitzpatrick,
for 1 minute for an opening statement.
Mr. Fitzpatrick. Thank you, Mr. Chairman, and I also thank
the witnesses for being here with us today.
Oversight of the Federal Government, whether it is
agencies, individuals, or other institutions, is crucial to our
system of checks and balances. The system provides an
opportunity for democratically elected representatives to
ensure these organizations are accountable to hard-working
American families and ensure that their day-to-day operations
are transparent.
Today, this subcommittee's role is to determine whether or
not one such entity has grown too large or too rapidly without
the expressed consent of the American people. Over the last 5
years, the Federal Reserve system of influence over the economy
has grown through the development of new rules and requirements
for our financial institutions with little involvement or
consultation by Congress. Furthermore, it is worth noting that
while the Fed is charged with maintaining the economic health
of our Nation, it has repeatedly ignored subpoenas and
sidestepped congressional inquiries.
Mr. Chairman, the Fed, like all of the Federal Government,
should remain open, transparent, and accountable to the
American people.
I yield back. And I look forward to the witnesses'
testimony.
Chairman Duffy. The gentleman yields back.
We now recognize our witnesses for introduction. First, Dr.
Mark Calabria is the director of financial regulation studies
at the Cato Institute. Before joining Cato in 2009, he spent 6
years as a member of the senior professional staff of the U.S.
Senate Committee on Banking, Housing, and Urban Affairs, where
I think they move just a bit slower, Dr. Calabria.
Second, Dr. Paul Kupiec is a resident scholar at the
American Enterprise Institute (AEI), where he studies systemic
risk in the management and regulation of banks and financial
markets.
Third, we have Dr. John Taylor. He is the George P. Shultz
Senior Fellow in Economics at the Hoover Institute and the Mary
and Robert Raymond Professor of Economics at Stanford
University. Dr. Taylor's field of expertise includes monetary
policy, fiscal policy, and international economics.
And finally, we have the Honorable Alice Rivlin. She is the
director of the Health Policy Center at the Brookings
Institution and the Leonard D. Schaffer Chair in Health Policy.
She is also a senior fellow in the Economic Studies Program at
Brookings and a visiting professor at the McCourt School of
Public Policy at Georgetown University.
The witnesses will now be recognized for 5 minutes to give
an oral presentation of their testimony. And without objection,
the witnesses' written statements will be made a part of the
record. Once the witnesses have finished presenting their
testimony, each member of the subcommittee will have 5 minutes
within which to ask questions.
On your table there are three lights. I think all of you
are very familiar with this. Green means go, yellow means you
have 1 minute left, and red means your time is up. The
microphones are very sensitive, so please make sure that you
are speaking directly into them.
With that, Dr. Calabria, you are now recognized for 5
minutes.
STATEMENT OF MARK A. CALABRIA, DIRECTOR, FINANCIAL REGULATION
STUDIES, CATO INSTITUTE
Mr. Calabria. Thank you. Chairman Duffy, Ranking Member
Green, and distinguished members of the subcommittee, thank you
for the invitation to appear at today's hearing. And let me
also say what an honor it is to be part of such a distinguished
panel.
The word ``accountability'' is often used in Washington
without reference to a clear meaning. So let me begin my
remarks by citing Webster's, which defines accountability as an
obligation or willingness to accept responsibility or to
account for one's actions.
My fellow panelist, John Taylor, has detailed elsewhere how
the Federal Reserves bears some responsibility for the boom and
bust in the housing market that led to the financial crisis. I
detail in my written remarks a number of Federal Reserve
regulatory mistakes that also contributed to the crisis.
Prominent among these was the Fed's support of using credit
default swaps to lower bank capital, the Fed's push for
adoption of Basel II, as well as the Fed's approach of off-
balance-sheet risk-taking by our largest banks.
Inherent in being accountable is first coming to terms with
one's mistakes. I would submit to the subcommittee that we have
yet to see the Fed atone or even admit to its contributions to
the crisis. Instead, what we have seen is repeated spin by the
Fed with the intent to distract us.
In no way has the Fed been held accountable for its
monetary regulatory mistakes. In fact, it has been rewarded by
the Dodd-Frank Act with increasing powers and responsibilities.
This is, of course, to say nothing of the personal rewards that
its senior management has received despite their own
culpability.
The logic behind Dodd-Frank would lead us to believe that
the same entity which believed it was wise to allow Citibank to
hold tens of billions in off-balance-sheet risk without any
capital backing that risk is best qualified to now conduct
similar supervision of large non-banks like MetLife.
Financial reform would have best been served, in my
opinion, had prudential supervision been removed altogether
from the Fed and placed at another agency, such as the FDIC.
Researchers have found, for instance, that countries with
central banks that are also engaged in bank regulation witness
more frequent crises, as well as have greater levels of
inflation. Dodd-Frank, to a small degree, held the Office of
Thrift Supervision accountable for its failures, yet failed to
do the same for the Federal Reserve.
As detailed in my written remarks, Dodd-Frank did make some
modest improvements in Fed transparency. I commend those. But
those should, at best, be viewed as a beginning rather than an
end.
Professor Joseph Stiglitz has suggested that an important
element of accountability for a central bank in a democracy is
for its decisions to be representative of that society. Section
10 of the Federal Reserve Act attempts to manage a degree of
representativeness with Board appointments. The ranking member
referenced juries. I think we would all want to believe that
juries should be representative of the population. So should
the Federal Reserve.
For instance, Section 10 prohibits having more than one
board member from the same bank district. Unfortunately, that
prohibition has been repeatedly violated. I suggest Congress
remedy that by specifying the Act's diversity requirements in
greater detail. I will note, for instance, that the Board
currently has only one member from a district west of the
Mississippi River. The Board has over time come to be dominated
by D.C. and New York interests, which reduces both its
legitimacy and its effectiveness in conducting monetary policy.
Greater oversight of the Fed is also merited given the
expansions of its actions beyond monetary policy. Many of the
Fed's actions during the crisis were fiscal in nature, such as
the rescue of AIG. Some monetary decisions, such as the
purchase of agency mortgage-backed securities, also moved into
the area of credit allocation. The more the Fed decides to pick
winners and losers in our society, the greater the need for
oversight by democratically elected officials.
Ultimately, both transparency and accountability would be
improved if the Fed's behavior were more rule-bound. A large
economics literature exists making the case for rules over
discretion, to which my fellow panelist, Dr. Taylor, has
contributed.
There is related literature in behavioral economics and
clinical psychology. Nobel-Prize-winning economist and
psychologist Daniel Kahneman has documented the conditions
under which we should prefer rules to discretion. His
conclusion is, ``To maximize predictive accuracy, final
decisions should be left to formulas, especially in low-
validity environments.'' I would submit to the committee that
monetary policy is the poster child for a low-validity
environment.
It is not simply a question of getting the right people to
engage in monetary policy. Any set of experts will be subject
to behavioral biases that will result in performance that would
be inferior to rule-bound decision-making.
Ulysses was wise enough to recognize his inability to
resist the siren songs. If we hope to avoid our current cycle
of asset booms and busts driven primarily by monetary policy,
then we too must embrace that wisdom.
I look forward to your questions and comments. Thank you.
[The prepared statement of Dr. Calabria can be found on
page 34 of the appendix.]
Chairman Duffy. The Chair now recognizes Dr. Kupiec for 5
minutes for a summary of his statement.
STATEMENT OF PAUL H. KUPIEC, RESIDENT SCHOLAR, AMERICAN
ENTERPRISE INSTITUTE
Mr. Kupiec. Chairman Duffy, Ranking Member Green, and
distinguished members of the subcommittee, thank you for
holding today's hearing and for inviting me to testify. I have
submitted detailed written testimony which I can only summarize
in my oral remarks.
The Federal Reserve was created by Congress, and Congress
has the duty to oversee this creation. The Fed's methods for
implementing monetary policy have changed drastically since the
2008 financial crisis. Many significant Fed policy changes
merit deeper congressional investigation.
Some of these include the FOMC's recent decision, without
congressional input, to reinterpret price stability to mean
annual expected inflation of 2 percent; the practice of
continuously re-defining the target rate of unemployment that
will trigger higher interest rates; claims that the prolonged
zero-interest-rate policy promotes economic growth without
creating conditions that lead to serious financial
instabilities; and credible assurances that the Fed's dual
mandate of price stability and maximum employment will not be
sacrificed to international pressures should financial market
panics occur in Europe, Asia, or elsewhere.
Many Federal Reserve regulatory activities also merit
closer congressional oversight. For example, Congress should
exercise much closer oversight over the Fed's involvement with
international standard-setting bodies, particularly the
Financial Stability Board (FSB). The Fed is a key member of the
FSB. The FSB formulates global financial stability policies, it
designates globally systemically financial institutions, and it
crafts international supervision agreements for their
regulation and the regulation of international financial
markets and institutions, and it sets capital regulations for
these firms.
The FSB's goal is to impose uniform international financial
stability policies on its members, and so it is no coincidence
that FSB agreements subsequently become U.S. financial
regulatory policy. The Fed should inform appropriate
congressional committees before it negotiates and finalizes FSB
policy directives, as these directives look a lot like
international treaties, at least to me.
To date, FSB designations have presaged all FSOC
designation decisions, which raises questions about the
integrity and independence of the FSOC designation process. The
FSB, you may recall, published a list of insurance G-SIFIs, and
later these same G-SIFIs were designated by the FSOC despite
protests from multiple U.S. insurance regulators. Many assume
that this pattern will be repeated when the FSOC addresses
shadow banking and other insurance designations.
In a second example, Congress should examine the recurring
Fed holding company stress tests mandated by Section 165 of the
Dodd-Frank Act. These stress tests are very expensive, both for
banks and for bank regulators, and yet there is no evidence
that these tests are a cost-effective method for supervising
individual financial institutions or for identifying hidden
risks in the financial sector.
Since stress test models have large estimation errors, Fed
stress test outcomes are at best merely wild guesses (WAGs) of
how these individual institutions will perform under imaginary
stress conditions. Under the stress tests, the Fed imposes
individualized regulatory requirements on institutions.
Sometimes these are punitive, but there is no mechanism to
appeal disputed Fed judgments to independent arbitration.
The arbitrary and uncertain character of these tests makes
it difficult for banks to anticipate their capital needs and
plan for the future.
Congress should also exercise much closer oversight over
the Fed's new regulatory responsibilities in the insurance
industry. The Fed is now examining insurers that have long been
examined and are still being examined by State insurance
supervisors. About one-third of the insurance industry is now
facing Federal Reserve supervision. For these firms, the Fed is
now imposing bank holding company standards on top of the
capital standards set by State insurance regulators.
The Fed is also involved in international bodies that set
international capital standards for insurers, and there is fear
within the industry that bank-like capital standards will be
imposed on insurance firms throughout the United States.
The Dodd-Frank framers were careful not to create a
national insurance regulator, and yet the Fed is taking steps
that make it, de facto, a national insurance regulator.
The Fed is also opaque on a number of other issues. It sets
its own accounting standards, and these standards deviate from
generally accepted accounting principles (GAAP) in ways that
may obscure the Fed's true financial condition, especially when
interest rates begin to rise to more normal levels.
They also act as if they are shielded from disclosing
operational details that are routinely disclosed by other
government agencies, for example, information on staff
salaries, benefits, and hiring practices, and most recently by
refusing to answer congressional requests for information on
Fed investigations into FOMC information leaks.
Congress must step up oversight, and insist on greater Fed
transparency.
Thank you.
[The prepared statement of Dr. Kupiec can be found on page
47 of the appendix. ]
Chairman Duffy. Thank you.
The Chair now recognizes Dr. Taylor for 5 minutes for a
summary of your statement.
STATEMENT OF JOHN B. TAYLOR, MARY AND ROBERT RAYMOND PROFESSOR
OF ECONOMICS, STANFORD UNIVERSITY
Mr. Taylor. Thank you, Mr. Chairman, and members of the
subcommittee, for inviting me to testify today.
One of the, I think, most productive ways to assess the
committee's and the Congress' concern about lack of
transparency and accountability at the Fed is to look at the
trends and what has happened in recent years.
As I look back, I see that one of the most important
transparency and accountability reforms, say in the last
quarter century, was the Fed simply announcing its target for
the Federal Funds Rate. That was in 1994. Before that, people
had to guess what the target was; they had to read the tea
leaves. And I think that lack of transparency gave an advantage
to those who were able to get the information. It also caused
considerable confusion about what the target was. The reform
fixed that.
The Fed took a number of additional steps in more recent
years, I think, to increase transparency, including releasing
projections of forecasts and interest rates, holding quarterly
press conferences, announcing a numerical target of 2 percent
for the inflation rate.
However, there have been important countervailing trends,
in my view. For example, in 2000 the Fed stopped reporting
ranges for future growth of the money supply as part of its
policy, removed those as part of the process when the
requirement to report was removed from the Federal Reserve Act
by the Congress. While dropping reporting about money growth
might not seem that significant, I think it is symptomatic of a
broader lack of transparency about the Fed's reporting its
strategy for the instruments of policy, whether it is money
growth, the Federal funds rate, or some of these unconventional
policies, such as quantitative easing.
One reason that there has been a reluctance of the Fed to
report or be transparent about its strategy for setting these
instruments in some of the newer tools, the unconventional
tools, is that it is very difficult to do so. With regard to
unconventional tools, their estimated effects are uncertain.
There is disagreement. It is very hard to stipulate a strategy.
In fact, some Governors have tried to do that and have found it
very difficult. To me, that is a clear disadvantage of these
unconventional tools.
But another reason to be reluctant on the part of the Fed
reporting its strategy is it thinks that simply setting the
goals for inflation or other variables is sufficient. I think
that is an incorrect view. I think you need to stipulate the
strategy.
May I bring the committee's attention to the Fed's
statement of longer-term goals and monetary policy strategies,
a particular document the Fed has released in 2012 and has
updated? If you look at that document, you can see that the
goals are stated, such as the 2 percent inflation rate, but
there is no strategy, despite the title of the document, for
achieving those goals.
At least, it seems to me, the Fed should be reporting its
strategy, certainly the rules or strategy that it uses
internally. That is simply a matter of transparency. It is hard
to see how one would object to that.
I also think this current environment, where there is a
lack of transparency about the strategy, creates the
possibility where some can benefit and some can't from the lack
of information. I think the controversy over the alleged leak
of information in October 2012, is an example of this. Again,
since it is so hard to formulate a strategy, it inevitably
becomes something where people want the latest information
about the unconventional policy. And I think that is the nature
of that alleged leak back in 2012.
If there were a clear and publicly announced strategy for
setting the instruments of policy, I think these kinds of
events would be far less likely. The information would be
available to all, and it would be as close as we can come to
doing that.
So in sum, while changes at the Fed, such as the
establishment and announcement of a numerical inflation goal,
have increased transparency and accountability in recent years,
as is frequently emphasized, I think a reluctance to establish
and announce a strategy to achieve those goals has created an
important offsetting countervailing trend. So in my view, the
resulting lack of transparency and accountability mentioned in
the title of this hearing needs to be reversed.
Thank you.
[The prepared statement of Dr. Taylor can be found on page
65 of the appendix.]
Chairman Duffy. Thank you, Dr. Taylor.
The Chair now recognized Dr. Rivlin for 5 minutes for a
summary of your testimony.
STATEMENT OF THE HONORABLE ALICE M. RIVLIN, SENIOR FELLOW,
ECONOMIC STUDIES, BROOKINGS INSTITUTION
Ms. Rivlin. Thank you, Mr. Chairman, and Ranking Member
Green. I am delighted to be back in this room again. The last
time I was here, I was actually invited to the full committee
by Chairman Hensarling. So I have switched sides.
The premise of this hearing appears to be that there is
something mysterious and opaque about the Federal Reserve's
conduct of monetary policy and some threat to our economy might
unfold out of view of the Congress and the public, and if
another group of experts appointed by the Congress were to get
in there, we would learn something important and be better off.
My views are quite different, and let me make three basic
points.
First, current monetary policy alternatives are
controversial, but they are not mysterious or opaque, and
Federal Reserve officials are making extraordinary efforts to
explain to Congress and the public the dilemmas that they face.
Right now, the Fed is making a fairly simple choice. It is
deciding when to raise interest rates, short-term interest
rates, and how fast to do that. Like a lot of monetary policy
decisions, this is a judgment call, views differ--I am sure
they differ on this panel--and you can make an argument on both
sides.
But I don't think the Fed is being at all mysterious about
this. Besides the advances in transparency that Dr. Taylor
alluded to, the minutes are much more explicit than they used
to be, they come out sooner, the Chair and other Fed officials
explain their views frequently and lucidly in speeches. The
Chair made a dandy speech in Cleveland this week. She will be
here tomorrow. She answers questions endlessly. She holds press
conferences after the FOMC.
There was a time, when I was at the Fed in the 1990s as
Vice Chair, that we were a lot more mysterious. But there has
been a lot of progress.
Second, I think nothing terrible or irreversible is likely
to happen if the Fed acts too quickly or too slowly at the
moment. The threats to our future prosperity are much more
likely to come from fiscal gridlock.
At the moment, inflation is not a danger. It is very hard
to see any way that inflation could take off suddenly and get
out of hand. Our economy is simply much less inflation-prone
than it used to be.
Unfortunately, the dominant scenario for the future is slow
growth in the labor force and in productivity. Fiscal policy
has a chance to turn that around by investing in infrastructure
and science and in the skills of the labor force and by
offsetting those investments with long-term control of our
rising debt. I think that is a very great responsibility, and
it is a responsibility of the Congress and the President, not
the Fed.
Third, monetary policy decisions can be politically
unpopular, and the creators of the Fed were wise to insulate
those decisions from political pressure. Injecting another
group to second-guess monetary policy decisions would undermine
an independent agency which is working hard to do what Congress
created it to do.
Monetary policy decisions are hard, and they have often
been made mistakenly. I wouldn't say the Fed has always been
right. But they are hard, and often the important thing to do
is very unpopular. And it is for that reason that I think the
Congress should not want and did not want when it created the
Federal Reserve to make monetary policy itself. Delegating
monetary policy to an independent body was a sound idea, and it
is working quite well, so I would advise you to leave well
enough alone.
Thank you.
[The prepared statement of Dr. Rivlin can be found on page
62 of the appendix.]
Chairman Duffy. I appreciate the panel's testimony. The
Chair now recognizes himself for 5 minutes for questions.
I want to talk about the Medley leak to start. Here you
have a well-connected group that is able to access private
information. The way we learned about it is because they
stupidly sent out an email the day before to everybody with
this private information, which begs the question, does this
happen more often than we actually hear about?
But I think in regard to transparency, I don't usually
agree with Elizabeth Warren, but when she talks about the game
being rigged, isn't this a perfect example of where if you are
powerful, if you are well-connected, the game is rigged against
those who aren't? You can get information from insiders at the
Fed if you are well-connected, but if you are not, you are like
the rest of us without good quality information that comes from
the inside.
Am I wrong on that, Dr. Calabria?
Mr. Calabria. I think you are absolutely right on that.
And I want to emphasize something that Dr. Taylor touched upon,
which is, if we had a predictable rules-bound policy that any
outside objective observer could figure out the direction of
the Fed, then the value of these leaks and trying to gather
inside information declines.
Chairman Duffy. It takes away the incentive to game the
system, right? It takes away the power of those who are well-
connected as opposed to everyone being treated fairly. Am I
correct on that?
Mr. Calabria. Yes, Absolutely.
Chairman Duffy. Dr. Taylor, do you agree?
Mr. Taylor. I think, Mr. Chairman, you listed some of the
concerns that there are about having leaks. That is why there
should be efforts to prevent that. It does give certain people
advantages and leads to concerns about connections.
Chairman Duffy. Dr. Kupiec?
Mr. Kupiec. It certainly would make the problem less
severe. I think if there is a monetary rule, if the Fed were
bound by some of Dr. Taylor's suggestions, they would still
deviate from the monetary rule from time to time and inside
information would still be valuable, but it wouldn't be to the
same degree that it is today. It would be far more predictable
and there would be less ability to sell inside information.
Chairman Duffy. Dr. Rivlin?
Ms. Rivlin. Leaks are a bad thing no matter what your
strategy for making monetary policy. There is no excuse for
leaks, and they ought to be ferreted out and punished.
Chairman Duffy. And would transparency, in some of the
reforms we have been talking about, help with the lack of need
for that insider information?
Ms. Rivlin. No, I don't think so. As long as the Federal
Reserve is charged with setting short-term interest rates,
there are people who are going to profit from knowing that
information in advance, and they should not have it.
Chairman Duffy. In regard to congressional oversight, Dr.
Rivlin, I am not sure if you followed the leak at all, but we
have asked continuously for information in regard to the
internal investigation at the Fed. We have asked for
information from the IG.
Now, this is not about monetary policy, contrary to what
the ranking member was talking about, this is about our
investigation into the leak. You would agree that Congress has
the right to oversee internal policy inside the Fed in regard
to these leaks, what kind of investigation they did, what kind
of recommendations they gave to the FBI or to their IG, you
would agree with that, correct?
Ms. Rivlin. I am not an expert on how you prosecute leaks.
They have turned it over to the Justice Department, which seems
to me appropriate.
Chairman Duffy. But you are not saying that Congress
doesn't have a role to garner information, right?
Ms. Rivlin. Congress certainly has a role, but I am not
sure that second-guessing the Justice Department when it is
trying to investigate a leak is a productive thing to do.
Chairman Duffy. I would just point out that no one is
second-guessing Justice. But Justice doesn't prohibit Congress
from accessing information. An IG investigation doesn't
prohibit Congress from accessing information. It is pretty
clear that we are entitled to do a complementary investigation
of anyone else who is doing one out there in regard to these
leaks.
It is serious stuff. And, frankly, the length of time it
has taken to actually get the ball rolling on an investigation
concerns many of us. And the fact that we are 3 years later and
only by congressional push do we have people actually looking
into the leak, I think the evidence would show that some folks
inside the Fed wanted to sweep it under the rug.
Quickly, Dr. Taylor, you have expressed your concern in
regard to transparency in how the Fed operates and implements
monetary policy. We have been talking about this FOMC leak from
2012. Do you see a connection between those two?
Mr. Taylor. I do, because if there is really no way to
describe the strategy of the Fed, if it is completely
discretionary, if there is a decision which is made each time
that is unrelated to the previous ones, yes, it creates the
opportunity for more things to be selectively leaked out.
So I think the more transparent the Fed can be with respect
to its strategy or its operations, the less chance there is for
such leaking. It doesn't eliminate it, of course. There have to
be ways to prevent it and take actions if it occurs. But it
reduces the chances.
Chairman Duffy. Thank you.
My time has expired. The Chair now recognizes the gentleman
from Missouri, Mr. Cleaver, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
Dr. Calabria, let me just tell you how strongly I support
your concern about members of the Fed west of the Mississippi,
in spite of the fact that my State is the only State with two
Fed offices. But the reason I do has nothing to do with this
hearing except for the fact that the Federal Government leans
to the East Coast in almost everything, including spending.
And that is why I am an obsessed person as it relates to
earmarks. It is one of the dumbest things that I think we could
do, is say I was elected by Congress and the Constitution gives
us the right to spend, but we are going to give it to the
President and the Administration.
And the money continues to lean toward the East Coast. It
doesn't cost the taxpayers one penny more than what the budget
is approved for operation. But all of this misinformation is
out in the world, and we are going to continue until we change
the lean to the East Coast. And I don't intend to live on the
East Coast. There are some nice people there. I am not mad at
any of them, just as I am not upset with you from our last
meeting.
But the other thing is, I also think that it is important
for us to all make sure we understand that this is not about
who supports trying to investigate the leak. In my real life, I
am a United Methodist pastor. If you leak information, if you
talk about confidentiality, the bishops, you are out of the
church. So I feel very strongly about it, and I think we ought
to prosecute to the fullest extent if the FBI can get to the
bottom of this. The other thing is, I support the chairman in
calling for this investigation and information to come to this
committee.
My concern, though, is that I think--we almost had a bill
approved, the Federal Reserve Transparency Act, which required
a number of audits, some of the things that we have been
talking about here. The chairman might remember--and it was
bipartisan, incidentally, strongly bipartisan, not the normal
stuff that we say bipartisan when it is one Member from the
other side. I think we had almost 100 Democrats on the bill. It
was introduced, as I recall, by Ron Paul.
And we were going to pass it up until the last day, until
there was an amendment by Congressman Watt from Charlotte. And
I think that if we have a spirit of working together again, we
could probably deal with some of the issues about which we may
have some mutual concern.
But my question is, and I would like to ask Dr. Taylor, if
not the Fed, then who? We have a number of responsibilities
that must be operated to preserve our economy, and if the Fed
doesn't do the monetary and credit oversight or the supervision
and regulation of banking or providing financial services to
depository institution, who does it? Do we just forget it? Or
do we pass it on to another agency? What happens?
Mr. Taylor. There is no question that with respect to
monetary policy, the Fed has the responsibility. And Congress
has oversight. But it has been given that responsibility. And I
think that, in principle, is the way it should be.
When you go beyond monetary policy to regulatory matters,
then there are, of course, other agencies, Federal agencies and
State agencies who can, and sometimes they are better off doing
this.
There seems to me a disadvantage to having one agency do
everything. It creates more power than I think is necessary.
So, there has been a delegation to different agencies, some
Federal, and in our system, some State. It seems to me that
makes sense.
One can worry about how that organization takes place. So
one of the things that happened in Dodd-Frank was to merge the
Office of Thrift Supervision into the Comptroller's Office.
That made sense. There was some bringing together of things
that shouldn't have been separate. So you can think about it,
but it seems to me, with respect to monetary policy, the Fed
has the responsibility.
I would add one thing. If an agency expands its mission,
what is frequently called mission creep, then I think there is
a concern. We have in our system a way to separate powers, that
Congress has roles for appropriation, for example.
And I would just add perhaps on the side to your question
about putting the agency in charge of the financial issues in
the Fed, without the scrutiny of the appropriation process,
seems to be not in the direction, that is in a sense giving
extra power to an agency, talking about the Consumer Financial
Protection Bureau, of course, which doesn't seem appropriate.
Mr. Fitzpatrick [presiding]. The gentleman's time has
expired.
Mr. Cleaver. Thank you, Mr. Chairman.
Mr. Fitzpatrick. The Chair recognizes himself for 5
minutes.
Chair Yellen, who will be before the full committee
tomorrow, has recently admitted that she had a meeting with
Medley Global Advisors. They are, of course, the political
intelligence firm that obtained the leaked information, FOMC
information.
Dr. Calabria, should members of the Board of Governors of
the Federal Reserve be speaking with political intelligence
firms who are in the business of selling their clients access
to the political decision-makers?
Mr. Calabria. I lean toward feeling the Fed should be open
to meeting with just about anybody who wants to meet with the
Fed. I think the importance is, you have to be aware of when
you are meeting. And, again, it is very difficult when you are
having a conversation with somebody to be guarded about what
you say. But I do think that if the Fed is going to meet with
political intelligence firms or market analysts in general, it
has to sit down with the understanding of it is really there
more to listen than to say anything.
Mr. Fitzpatrick. Dr. Kupiec, what are the risks?
Mr. Kupiec. Pardon me?
Mr. Fitzpatrick. What are the risks?
Mr. Kupiec. I think the risks are what you see now. I
think there have to be limits on this, definitely. I worked at
the Federal Reserve for 10 years, so I am very familiar with
what goes on. I saw past division directors who went to work
for Wall Street firms or intelligence firms regularly come back
and talk with Governors and all of that seemed highly
inappropriate to me.
I share Mark's opinion that the Federal Reserve in its
communications with the public in general has to meet with
people who want to meet with it occasionally, but you can limit
these things. For example, Federal Reserve Governors--according
to the Government Sunshine Act, you can't have more than, I
forget how many, three or four of them meeting at any one time
or it has to be declared a meeting. So they can't even talk
with the other Governors in private. So I think there are
definitely rules that could be put in place to limit this.
Mr. Fitzpatrick. Dr. Kupiec, in your written testimony you
wrote that the practice of continuously redefining the Fed's
target rate of unemployment that is consistent with ``maximum
employment and price stability,'' you indicated that is a
change in monetary policy that would mandate a required deeper
congressional oversight or investigation.
Mr. Kupiec. I think the Fed has changed its operating
policies to such a degree since 2008, and many of these things
are big deals. The QE policies. Their mandate is price
stability, yet in 2014 they redefined price stability to be 2
percent annual target inflation rate. Now, inflation targeting
is common, but they did that without any consultation with
Congress, without any discussion.
Price stability is not the same thing as a constant
inflation rate. Those are not the same things. There should
have been discussion. There should have been oversight. There
should have been consultation.
The unemployment rate, it is the thing that we discuss over
and over again. One of these days, we are going to hit the
right unemployment rate in the next 2, 3, 4, however many
years, where the Fed is going to raise rates. But there is no
way you can tell from the discussion that goes on what the
target rate is.
So this interjects the uncertainty. It gives rise to the
insider information and the problems we see. Something that is
more constrained by some kind of stated target would be much
more acceptable or at least some discussion with Congress about
that.
Mr. Fitzpatrick. Dr. Calabria, increasingly it seems that
our regulatory regime is being dictated by international
organizations--one example is the G20's Financial Stability
Board--instead of organizations that would be more inclined to
promote the interests of the United States of America. Why do
you think this is occurring?
Mr. Calabria. I certainly think we need to be very
concerned when you see these designations, then therefore FSOC
follows up and the pressure comes there. So certainly as a
start, in my opinion, the U.S. representative should not be
voting for any sort of delegation of a U.S. firm that FSOC
itself has not already voted on. The process needs to start
there rather than the other way around.
Certainly, and we saw this come out during the trade
debates and it is just as relevant here, the extent to which we
actually see these regulatory bodies engage in treaty-making.
And I think that is a very real concern and there has to be
vigorous oversight of that area.
Mr. Fitzpatrick. What are the long-term risks of ceding
the authority?
Mr. Calabria. I think the risk there is that you get
decisions made that aren't necessarily democratically
accountable. You don't get decisions that are input from other
regulators. So FSOC, for instance, was meant to be a process
where the other regulators would have some input. So, for
instance, when the Federal Reserve might go to the Financial
Stability Board and discuss insurance companies without having
the insurance representatives of FSOC as part of that process,
that cuts out that ability for FSOC to be truly representative
of the agencies in question.
I am not a fan of FSOC, but we decided to set it up, and we
decided to set it up to concentrate this decision-making in
that body, and therefore the Fed and Treasury and others should
not be making decisions that are within its jurisdiction.
Mr. Fitzpatrick. Thank you for your response.
The Chair now recognizes the gentleman from Virginia, Mr.
Hurt, for 5 minutes.
Mr. Hurt. Thank you, Mr. Chairman.
I thank the members of this panel for joining us today. I
had a question that might be a little larger than looking at
specific situations where we need more accountability in a
granular level. I was struck by a phrase that you used, Dr.
Calabria, in terms of the role of a central bank in a
democracy, the role of a central bank in a democracy. And I
start from going to our Constitution, which of course sets out
our legislative powers in Article I and the executive powers in
Article II.
As we have seen over recent years, and this has been of
course exaggerated by the Dodd-Frank Act, the Fed has an
enhanced role in policymaking, more regulatory powers, more
policymaking powers, as opposed to just monetary policy.
Yesterday, Chairman Neugebauer hosted a roundtable on the
issue of liquidity in the corporate bond market. And the
question of course is whether or not the market is liquid and
can withstand future stress and the risk that poses to
pensioners and, ultimately, to taxpayers.
I think it is ironic, and I think my constituents in
Virginia's Fifth District would find it ironic that you look at
a housing policy prior to 2008 that fueled a bubble that burst
and left homeowners and taxpayers on the hook. Here, in
response to the crisis in 2008, we have a zero-interest-rate
policy that has fueled a corporate bond market or bond issuance
on the one hand, and now you have the Federal Reserve playing a
major role with the right hand in strangling that capacity to
be able to absorb those issues in the marketplace.
And so I guess my question, and I would ask Ms. Rivlin to
begin and then go to Dr. Taylor and then Dr. Calabria, but from
the larger standpoint, from a structural standpoint, should we
be concerned about this, about the amount of power that the
Federal Reserve has as part of the policymaking that has such
an important effect on our economy? And where is the
accountability to the American people who ultimately should
hold policymakers accountable?
Ms. Rivlin. Yes, I think you should be concerned about it.
I do believe you need to set monetary policy, an independent
central bank, and we have one.
With respect to regulatory policy, I think there are some
serious issues here. When you passed Dodd-Frank you opted to,
for a very complicated structure, keep a lot of the supervision
and regulation in the plethora of agencies that were doing it,
only abolishing one, creating the FSOC, and giving the Fed
responsibility, which I think is appropriate, for major
systemic risk. But the situation is very complicated. When I
originally testified on Dodd-Frank, I was more in the Dodd
camp, that you should consolidate the regulators.
Mr. Hurt. And I don't mean to cut you off, but I would say
that the question is, I don't think the Constitution in Article
I says that Congress has power to legislate in everything
except complicated matters. And I guess that is my concern.
Dr. Taylor, and then Dr. Calabria?
Mr. Taylor. I would just say, yes, I agree completely, you
should be concerned about overreach. I think just one of the
things, for example, that has concerned me is some of the
unconventional policies where massive purchases of mortgage-
backed securities. It seems to me that is beyond the usual
purview and does get into the area of credit policy and fiscal
policy of the Congress.
Mr. Calabria. I certainly share those concerns. As I
mentioned earlier, I would get the Fed out of bank regulation.
Certainly, there are going to be some downsides to that, but I
think the upsides are better, and I think it would actually
improve the independence of monetary policy. And of course try
to get the Fed out of things that clearly look fiscal will keep
them out of some of these arguments.
Mr. Hurt. Thank you. I yield back my time.
Mr. Fitzpatrick. The gentleman's time has expired.
The Chair recognizes the gentleman from South Carolina, Mr.
Mulvaney, for 5 minutes.
Mr. Mulvaney. I thank the gentleman. And I thank all of
the panelists for doing something that I welcome the
opportunity to do, which is to sit and talk about an issue for
a while, as opposed to try and make political points.
Ms. Rivlin, during your opening statement you said
something that I thought was very accurate and very insightful,
but I hope you understand that there is another side of the
coin, which is you mentioned the importance of the Fed, the
independence of the Fed in making monetary policy and making
politically unpopular decisions.
I think that the difficulty that many of us perceive on
this side of the aisle is that hasn't happened nearly enough
for the last 8 years and that the risk that we see is that the
Fed will lose its ability to make unpopular decisions and
simply make a bunch of popular decisions. It has been easy
politically to keep rates at zero for a long period of time,
along with some other decisions that they have made.
So we are worried about the Fed's ability to do exactly
what you just talked about, which is make difficult decisions,
especially when it comes to Wall Street.
Would you agree with me, by the way, Ms. Rivlin, and I am
just thinking off the top of my head, that sometimes you will
be called upon to make, at the Fed, decisions that are bad for
Wall Street? Or do you think that what is good for Wall Street
is what is good for the country?
Ms. Rivlin. I think it is a question of long run and short
run. Whoever regulates Wall Street has an enormous
responsibility to avoid what happened in 2008. We can't afford
that again. And I think that regulation, if a bubble is
imminent or on the horizon, is going to be seen as inimical to
Wall Street. It will involve raising capital standards and
limiting liquidity, all of those things the big banks will say
is terrible. They will need to be done to avoid another crash.
And in the long run, Wall Street and Main Street benefit from
having a strong economy and one that does not repeat the
mistakes of 2008.
Mr. Mulvaney. And certainly I agree with that. I guess I
just ask you to consider as you go forward and you look at this
issue that some of us, myself included, are concerned about
what we perceive as, this is not the right word, but the
parallel would be regulatory capture within the regulatory
agencies, that the Fed becomes so close to Wall Street that it
becomes incapable of making a decision that would be against
the short-term interests of some of the folks whom it oversees.
But that is not what I want to talk about. Dr. Kupiec, I
want to talk about what we came here today to talk about, which
is some of the things we can do better going forward on Fed
oversight. And you mentioned something that was of interest to
me. We have had a couple of hearings these past months on the
IMF, and you said to pay closer attention to the international
regulatory bodies. Tell us a little bit more about that and
what you think we might be able to do on that front.
Mr. Kupiec. I think there have been bills already
introduced that would require, in the Senate at least I think
the bill was introduced, that would require the Federal Reserve
to give the appropriate committees notice before they go to
negotiate on international agreements on capital or G-SIFI or
anything like that, and give appropriate notice to Congress and
the public, and to come back and report on the outcome of these
negotiations. And I think steps like that would be very
helpful.
Mr. Mulvaney. Have you ever given any thought to the role
that the international groups play on monetary policy? I saw
something that I guess is not unusual, I have not paid any
attention to it before. About 2 weeks ago, the IMF came out
with, not a recommendation, but a view that the Fed shouldn't
raise interest rates, it would be bad for the U.S. economy and
the global economy. Should we be concerned or at least should
we be paying attention to the types of exterior influences that
those groups have on the Fed?
Mr. Kupiec. I think the Fed demonstrated in 2008 it was
really the central bank to the world. And I think these
international pressures to influence domestic monetary policy,
policy that should be targeted at domestic U.S. interests, will
come.
And I think you could interpret the Lagarde comments, the
IMF comments two ways. It could be giving the Federal Reserve
cover not to raise rates, even though they had telegraphed it
for the last so many years that eventually rates would rise and
it gives the Fed an excuse not to raise rates. But you could
look at it the other way, that there will be international
pressures. I think in the future, when other parts of the world
stumble badly and they want dollar liquidity, there will be
push to have the Federal Reserve act.
Mr. Mulvaney. Dr. Taylor, very quickly, because I have
very little time, you mentioned in your opening statement about
the new document, the statement of long-term goals and monetary
strategy, and you said that it was a little short on strategy.
What would the objections be, do you think, sir, to doing what
you suggested, which is being more articulate in strategy going
forward?
Mr. Taylor. One objection is that they say we don't need
to tell you our strategy, we just tell you our goals and you
let us do whatever it takes to achieve the goals. It is a view,
I disagree with that, but that is what has been stated--look,
we gave you the goals, what more do you want? I think in a way,
the goals distract. They are good, but they can distract from
what the strategy is.
Mr. Mulvaney. Thank you.
And back to the original point, Mr. Chairman, I think what
concerns me is that when they don't lay out the strategy, we do
end up with these extraordinary measures that we didn't even
know were on the table. Taking a balance sheet to $4 trillion
is something that I don't think anybody expected going in. So I
happen to agree with Mr. Taylor that we may want to push them
more on what tools they decide to use to get to their goals.
I yield back. Thank you.
Mr. Fitzpatrick. The gentleman's time has expired.
The Chair recognizes the gentlelady from Ohio, Mrs. Beatty,
for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman.
And thank you to our ranking member.
I also thank our witnesses for being here today.
I believe as I was coming in, Mr. Kupiec, I heard you
talking about employment and price stability. While certainly,
as we know, the United States economy continues to recover, it
is important for us to understand the Federal Reserve's dual
mandate to achieve maximum employment and price stability, as
well as to understand that Congress continues to have oversight
of the Fed, but to allow the Fed's monetary policy independence
to achieve what I am going to refer to as these ``twin goals.''
So, I would like to discuss the Fed's role in bank
supervision. I think the Federal Reserve's Governor stated: The
most important contribution we can make to the global financial
system is to ensure the stability of the United States'
financial system. So when we think of that, when we think of
the $50 billion asset threshold, which I am on the record as
saying that I think it should be higher, and while we talk
about how a $100 billion asset threshold might make more sense,
I don't know that I agree with a threshold alone being enough
to warrant how we treat the banks and how we label them.
My question for the panel is, was Dodd-Frank's Section 165,
enhanced supervision, supposed to apply to firms that lack
systemic importance to the stability of the United States
financial system? And if not, what are those domestic effects
on having regulators apply enhanced supervision to such
institutions?
Mr. Kupiec. Thank you.
Section 165, if you read it, and I am sure you have, it is
about financial stability. The enhanced prudential standards
are standards that are supposed to be imposed because the firms
they are imposed on, if they were to get into financial
distress, could cause a crisis. They could cause financial
markets to lock up, to dysfunction. And so the whole idea that
a $50 billion dollar institution could bring the U.S. financial
markets to its knees, I think is crazy. The $50 billion
threshold is way too low.
Last week, I testified in Chairman Neugebauer's
subcommittee, the Subcommittee on Financial Institutions and
Consumer Credit, on a more appropriate way to designate
institutions, and this is going back to the modification of
Congressman Luetkemeyer and his colleagues' bill where the FSOC
would consider designations.
But to differ from Congressman Luetkemeyer's bill, the
whole financial systemic risk debate has moved to designating
subsidiaries as critical for the financial system. So if you
look at the resolution policies that now are being promoted
internationally and domestically by the FDIC, they say what you
really have to do to maintain financial stability is if a firm
gets into trouble, you have to keep the subsidiaries open and
operating to prevent financial systemic risk.
And so what I would argue is, you would look at the
subsidiaries and designate subsidiaries as being the
systemically important subsidiaries, and that would take away
the whole threshold. So you could be a large firm, but you
could be well-diversified and have a number of small
subsidiaries and none of them might be critical for the
function of the financial market.
So I think it really is the way the resolution ideas are
moving, and it would mandate legislative changes to Section 165
of the Dodd-Frank Act in how we designated firms.
Mrs. Beatty. Okay. In my last few seconds, certainly you
know by law that the Federal Reserve conducts monetary policy
to achieve maximum employment, stable prices, and moderate
long-term interest rates.
Dr. Rivlin, would you please discuss, to the best of your
knowledge, what effects Federal monetary policy has, if any, on
employment and perhaps through sustained low interest rates on
wage growth?
Ms. Rivlin. The Fed has several ways of affecting the
level of activity in the economy. The most obvious one is
control of short-term interest rates. And in an economy that is
operating below its potential, and recently we have been way
below our potential, it can stimulate some investment and
activity by keeping rates low.
During the recent years, they also realized they needed to
keep long-term rates low, and that was the reason for the bond
buying quantitative easing.
These are fairly blunt instruments, but they use them as
well as they can, and I think by and large, they are doing a
pretty good job.
Mr. Fitzpatrick. The gentlelady's time has expired.
The Chair now recognizes the gentleman from Illinois, Mr.
Hultgren, for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman.
And thank you all for being here. I appreciate your work
and your words today.
I want to spend just a couple of minutes, and address this
to Dr. Kupiec, if I could, talking just a little bit more, and
I think at the opening statements of the hearing today, we
certainly heard a difference of opinion of the role of Congress
in oversight of the Fed and whether that should happen or not,
or whether the Fed should be completely independent.
And I see, again, following up on Chairman Duffy's
questioning a little bit about the 2012 FOMC leak, it really
raises concerns for me and others, but also failure to disclose
that to Congress, raises additional concerns as well.
I wonder if you would talk just briefly about the benefits
of proper oversight that happen in the marketplace as we are
truly doing our job as a Congress to oversee the Fed, but also
negative effects if we fail to do our job.
Dr. Kupiec?
Mr. Kupiec. Congressional oversight is very important. The
way the system is working now, the Federal Reserve has been
given enormous discretion to craft policies. And these
policies, the ones that are being crafted internationally, take
a number of years to put in place, and Congress may not revisit
them till the end, when all the work is done. And as I say,
these things are very much put together like treaties, and it
becomes very difficult for the Congress to intervene and to
change a process or stop a process if it is not in the
direction that was originally intended in the law.
Mr. Hultgren. So it is important to be part of the process
throughout and not jump in just at the end?
Mr. Kupiec. That is what I elect you for, yes.
Mr. Hultgren. Yes. I am going to shift and talk a little
bit about some other questions I have.
Dr. Taylor, if I can address some questions to you. And
really looking at these last 6 years, I would say, have been
defined by the Federal Reserve's exceptionally interventionist
and discretionary monetary policy. I would say thus far this
monetary experiment has not produced desired results, but has
created enormous amounts of uncertainty about the future.
As we are moving forward and we see the Fed has ended its
quantitative easing program and is beginning to think about
raising interest rates, which we think might happen soon, are
we approaching a point where a rules-based approach to setting
interest rates, an approach you have supported in the past,
would again be useful? And if we do see that type of approach,
what type of transparency would also come along with that?
Mr. Taylor. I certainly think we have come to the point
where such a process would be useful. I actually think it would
have been useful a little earlier, to be sure.
Mr. Hultgren. Me, too.
Mr. Taylor. Just to elaborate, I think the Fed's actions
in the panic, lender-of-last-resort actions, have done a lot of
good, it was basically hard to disagree with that, details of
course. But before that, I think what Mr. Calabria mentioned,
the rates being so low, which helped induce some of the
excesses, that was really not according to the rules that
worked in the 1980s and 1990s. And then subsequently to that,
the unconventional policies, et cetera, I think, were not
effective.
So the sooner, the better, in terms of getting back to the
things that worked, is the way I would put it, the things that
worked in the past, we would be better off doing that.
Mr. Hultgren. What can we do to help push that? What do
you think our role ought to be in that?
Mr. Taylor. I think the best thing is to ask the Fed to
describe their strategy, then there can be a discussion about
it. Without going much further, I agree with the sentiments
that this committee, and the Congress cannot micromanage the
Fed, and shouldn't be doing monetary policy. But it can ask the
Fed to describe what its policy is, what its strategy is. It
can even say: Change it, if you want, but tell us why. It seems
to me that is part of the oversight, part of the
accountability, and I think that is what the Congress could do.
Mr. Hultgren. I think that is a good balance. And it
doesn't have to be either/or, either we are completely involved
or completely hands off, but, again, recognize that we do have
a role there.
Dr. Calabria, do you have any thoughts on that? Do you
agree with Dr. Taylor on this? Are there other suggestions you
would have for us?
Mr. Calabria. Absolutely. I think the oversight role is
incredibly important. And I say this as a former staffer of the
Senate Banking Committee. I wish we had done more oversight of
the Fed before the crisis, and I think some of this would have
been avoided.
It is certainly worth remembering, in talking about the
importance of an independent Fed, that the Constitution
delegates that authority from Congress. And so it is more
likely often than not the Executive Branch which will have
incentives for short-term goosing of the economy, if you will.
As you know from being up here, the notion that Congress will
have one single viewpoint on monetary policy is simply not
going to be the case.
So I do think it is important for Congress to serve as an
important counterweight to the Executive Branch, which has much
more clearly defined incentives in terms of monetary policy.
Mr. Hultgren. Great point.
Thank you all again.
My time has expired. I yield back, Mr. Chairman. Thank you.
Mr. Fitzpatrick. The Chair now recognizes the gentleman
from Maine, Mr. Poliquin, for 5 minutes.
Mr. Poliquin. Thank you, Mr. Chairman.
And I thank the witnesses for being here today. I
appreciate it very much.
With Chair Yellen coming in tomorrow for her regular
testimony, I think it is a great time for us to dig into a
little bit about the accountability that the Fed has with
respect to regulating our economy and financial markets.
Every day I talk to business owners in our district up in
Maine who are encumbered with mountains and mountains of
regulations that are preventing them from growing and hiring
more people. In fact, they spend more time trying to comply
with Federal regulation and more of a cost than they do in
selling more of their products.
So I am very concerned about this. I believe there does
have to be a balance between fair regulations, predictable
regulations, but also not killing jobs.
Now, one of the concerns that I have with the Fed is they
continue to push back on wanting their independence, and they
should be independent, of course; I think we all agree with
that. However, they have also to date failed to comply with
subpoenas that have been issued by Congress through this
committee.
And so I am a little bit concerned about that. When you
look at some of the information that was disclosed in 2012, in
a confidential deliberation at the Fed disclosed to one party,
such that that Wall Street participant gave special
consideration to their clients in violation of the law. And
also it put other investors around this country, millions of
investors saving for their retirement who were not subject to
or didn't have access to that same information. So I am very
concerned about that, and I want to be on record about that
going forward.
That being said, I would now like to turn my attention to a
slightly different topic. Mr. Kupiec, if you don't mind, I know
in the past you have expressed concern about the living will
process under the Dodd-Frank set of guidelines or set of
regulations. And I believe you are even more concerned that
process could be a hindrance to capital formation and growth
and what have you in the non-bank financial institution space,
specifically with the insurance companies and with asset
managers, mutual funds, and pension fund managers.
Now, when you have insurance companies that are already
regulated by 50 State regulators and you have investment
managers who run $24 trillion of retirement savings across this
country already regulated by the SEC, now the Fed wants to get
involved. Could you dig into this a little bit, sir, and tell
us what that might look like? And do you believe that the Fed
has any experience in this area?
Mr. Kupiec. Thank you for the question.
The whole issue about whether asset managers and large
insurers are systemically important institutions is a sticky
one. AIG, of course, needed assistance during the crisis, but
that really--the problems at AIG were not inherently from the
insurance company parts of it. The insurance companies were
completely fine. It was with a derivatives company that was in
London, and it was under the Office of Thrift Supervision
oversight and just not done very well.
But that carried over. That carried over to the insurance
companies after the crisis, and it really isn't warranted.
Asset managers--the more we tighten down on banks and bank
regulation and we keep people from making--the longer we keep
zero-interest-rate policies, that you and I put money in the
bank and we earn nothing on it, the more we force investors who
need to earn a return on their money to go to securities
markets, to go to mutual funds. And so the growth is really in
the mutual fund industry.
The harder the Fed and banking regulators squeeze the
banks, the more the money flows out, which is quite a natural
reaction in markets. But, of course, the regulators want to get
ahold of that because the horse is leaving the barn. The game
for them is over.
And so what they really want to do, and one of the problems
is, is to impose bank-like regulation on asset managers, mutual
funds, things like treating money market mutual funds as if
they are an insured bank account. They argue, well, we have
to--
Mr. Poliquin. But if I may, Dr. Kupiec, if you have a
couple of asset management firms, those assets are not on the
balance sheet of those firms. That is someone else's money that
they are managing. So there is no systemic risk to the market,
because if there is a problem, the money just goes to another
asset manager and the actual securities are held in a trust
department down the road.
Mr. Kupiec. You are absolutely right. There is no
leverage. The people who own the mutual funds own the assets.
They take the losses. There is no safety net subsidy. There is
no reason for systemic risk problem here, in my opinion.
Mr. Poliquin. Thank you very much, Dr. Kupiec, for
clearing that up for all of us. I appreciate it.
Mr. Chairman, I yield back my time. Thank you.
Mr. Fitzpatrick. The gentleman from Arkansas, Mr. Hill, is
recognized for 5 minutes.
Mr. Hill. Thank you, Mr. Chairman. I thank the ranking
member as well, and I thank this distinguished panel for being
with us today.
I wanted to go back and talk about Section 13(3) authority,
and get your views on that subject. We had crashes and
depressions for 100 years before the Fed was formed in 1913,
and we have certainly had some doozies since 1913. And I would
like the panel's views on the Fed's use of 13(3), the Bagehot
Rule, to go back to Lombard Street, ancient days; and also your
thoughts on whether such power should be somehow limited to
just depository institutions rather than the economy as a
whole.
I will start with you, Dr. Calabria.
Mr. Calabria. Let me peel away the onion of that question.
First, let me start with the nonbankers versus bank latter
part of it. So certainly 13(3), in my opinion, is largely for
nonbanks, because banks should be able to go to the discount
window or other lending functions. So if we want to have
nonbanks to have access to some sort of Fed assistance, that is
largely going to be 13(3).
My druthers would be not to have that authority at all. If
you are going to have that authority, I do think that authority
needs to be limited to firms that are indeed solvent and should
be broadly available. I will take this as a moment to say the
approach that Senators Warren and Vitter have suggested in the
Senate, I think, is a wise approach in the step to try to at
least add some actual flesh to what Dodd-Frank tries to do in
terms of limiting 13(3). But, again, let me end with saying, if
I had my choice, we wouldn't have those authorities to begin
with.
Mr Hill. Dr. Kupiec?
Mr. Kupiec. Banks are special, and we have central banks
in part to be able to provide lender-of-last-resort authority
to depository institutions when they need it, provided they are
solvent, and I think those powers are necessary. Whether the
Federal Reserve should have special powers outside of that to
other financial firms, I think that has to be limited, much
more limited.
Right now, the rules in Dodd-Frank, some would argue that
they are too restrictive on the Fed. I think the Fed argues
that. But many think that the rules are written in a way--one
of the rules is they have to--if they are going to have a
special lending facility, it has to be a facility tailored for
the whole industry to use. But you could easily tailor a
facility that only one firm decided to use, and so there is
always a way around the rules. And so many believe these 13(3)
rules are not restrictive enough.
I think this issue does need to be revisited, and the
Congress should make a decision about how far it wants the Fed
to have these special lending powers. I think they are an
issue.
Mr. Hill. Dr. Taylor?
Mr. Taylor. I think it certainly should be limited, to
answer your question. My preference would be to limit it to
depository institutions, obviously solvent ones. And this comes
to the rules that you implement and what the collateral should
be, what the penalty rate should be. I think the Fed should
stipulate what that should be as best as it can, and I would be
on the side of limiting it more than others.
Mr. Hill. Dr. Rivlin?
Ms. Rivlin. One of the main things we learned from the
2008 crisis is that systemic risk can come from every
direction. In 2008, it came primarily from nondepository
institutions, although it came from all of them. I believe the
Fed needed the powers once we were in that situation, which we
never should have been, to lend to nondepository institutions
as quickly as possible. The rules need to be reconsidered, but
I would not make them along those lines.
Mr. Hill. Thank you.
Let's shift gears, Dr. Kupiec, to the issue you brought up
in your testimony about the directives from the FSB. And tell
me the statute that our regulators implement without
discussion, FSB directives. What is the statute in the United
States that permits them to do what they are told by the FSB.
Mr. Kupiec. There is no statute.
Mr. Hill. How do they do that then?
Mr. Kupiec. It is a mystery.
Mr. Hill. Can you explain the mystery, please, in 9
seconds?
Mr. Kupiec. The President and the Secretary of the
Treasury met in G-20 discussions on or about 2011 and created
this international group called the Financial Stability Board
that was supposed to make the world safe for all financial
markets forevermore. And so they take it as a directive, I
think, more from the Executive Branch that the rules crafted in
the FSB--somehow they are empowered to put those rules in place
in the United States.
Mr. Hill. Thank you.
I yield back, Mr. Chairman.
Mr. Fitzpatrick. The Chair now recognizes the gentleman
from Colorado, Mr. Tipton, for 5 minutes.
Mr. Tipton. Thank you, Mr. Chairman.
I would like to thank our panel as well for being here.
Dr. Kupiec, I appreciated your words when you were talking
about uncertainty in the marketplace and a need for clarity.
But I think there is a lot of concern when we are talking about
transparency and accountability as we continue to see the
Federal Government, through a variety of different
organizations, continue to extend its footprint in terms of
regulatory authority. And I think we can make a very credible
argument that if we are not having inflation, we are having
taxation via regulation, because ultimately these costs are
being passed on to the American consumer, driving up costs.
But what I would like to be able to maybe focus on and get
your comments on is we have now a lot of our entities that are
looking to be able to get out from under the designation of
being a SIFI. We have General Electric right now trying to be
able to sell off some of its assets simply to get out from
under the designation and the onerous provisions that are going
to be inhibiting their ability, and increasing costs for
consumers, by the way.
Would you like to maybe speak a little bit about that
uncertainty, that lack of clarity that we are seeing out of
that designation process? Is it, to quote your words from just
a moment ago, just a great mystery, a guessing game that we are
having to play?
Mr. Kupiec. The designation as systemically important
under Section 165 of the Dodd-Frank Act causes a lot of new
rules and regulations. One of the most onerous ones is the CCAR
stress test, the big stress test that the Federal Reserve Board
does annually. And one of the reasons is because it is really a
guessing game. There is no good model in which you can put in a
macroeconomic scenario and accurately forecast how a financial
institution is going to perform. That is a fictional story.
The people in charge love it because it played well in 2009
with the stress test. But the fact of the matter is there isn't
a stress test anywhere on the globe that ever detected a crisis
before it happened or even designated the firms that got into
trouble when the crisis happened. There is just so much
uncertainty, you can't model it.
And this gives rise to lots of problems when firms go in
every year. They spend millions of dollars, hundreds of
millions of dollars trying to model it. And their models now
are more aimed at modeling how they think the Fed is going to
model it rather than what actually happens.
And these are totally fictional, hypothetical scenarios in
which their management is forced to put huge effort and huge
money on modeling a fictional event that never happens. And if
they get a bad grade on that story by the Fed, they can't pay a
dividend, they can't buy back a stock, they might not be able
to merge with anybody or open up another line of business.
So this is a very judgmental regulatory approach that
really isn't based in science at all, and I think it is very
destructive.
Mr. Tipton. So we are modeling for the modeling without an
instruction manual?
Mr. Kupiec. Yes. And we have built a huge industry to
support the modeling of the model.
Mr. Tipton. I believe you are right on that. We just had
Secretary Lew before this committee and he refused to answer
and give any kind of real information in terms of what
information is going to be required for that designation for
companies to actually be able to respond to.
I would like to be able to follow up maybe with Dr.
Calabria in regards to some of your comments in regards to just
the composition under the Federal Reserve Act for designation
on the Board. Why is that diversity important?
Mr. Calabria. Because I think it is important to keep in
mind that different parts of the country move at different
paces. Texas is not California. Colorado is not Alabama. And
so, I do think if you want a monetary policy that essentially
tries to do the best to everybody in the country, you need to
have that diversity in the Board.
And I will certainly say as an aside, that the Fed should
simply follow the law. The law says no more than two members
from one district. It is actually pretty clear. And the fact
that that has been flaunted regularly, to me, respect for the
law has to start with the regulators or why would the regulated
entities think that anything goes themselves.
But, again, the important part is so that you can get a
variety of viewpoints so it is not simply Washington or New
York that dominates the policymaking.
Mr. Tipton. And just a final question, for anyone who
would like to speak on this; it is a real concern. I think our
first obligation is to make sure that the economy of the United
States is sound, that our economy is working for our people.
And when I hear it is a mystery in regards to the FSOC and its
response to the FSB, how concerned should we really be that we
are having our policies driven by foreign entities as opposed
to charting our own course?
Mr. Taylor. You are addressing that generally?
Mr. Tipton. Yes.
Mr. Taylor. One thing I would add to this, is that it is
important to discuss and collaborate with other entities what
is going on, with other governments, with other regulatory
agencies. The Financial Stability Board began as something
called the Financial Stability Forum. And I served on that. It
basically had an advantage. You had representatives from the
treasuries, the finance ministers, the central banks, and from
some regulatory agencies, in our case, the SEC. So, those
discussions were quite fruitful.
I think there is a concern that actually policy is being
made and that commits the United States in some way. So
collaboration, if you like, or essentially discussion of what
is going on in these groups with the Congress, I think is quite
important. But the fact that they exist, I think is not the
problem.
Chairman Duffy. The gentleman's time has expired.
The Chair now recognizes the ranking member of the
subcommitee, the gentleman from Texas, Mr. Green, for 5
minutes.
Mr. Green. Thank you, Mr. Chairman.
And I thank the witnesses again and apologize for having to
step away for a moment.
I would like to go to Ms. Rivlin.
Ms. Rivlin, on page 3 of your testimony you indicate that
the campaign to audit the Fed is a misleading misnomer. And I
would like for you to elaborate on this if you would. You go on
to indicate, to say that it is nonsense, and that the Fed is
audited. Would you kindly elaborate?
Ms. Rivlin. Yes. I think the idea that the Fed is not
audited is inherent in the title of the campaign to audit the
Fed, and it makes people think maybe they don't have auditors
in there the way ordinary financial institutions have to. And
that is simply not true. The books of the Fed are carefully
audited. They are audited by one of the Big Three, Big Four,
whatever, auditing firms and by the GAO.
So it is a misnomer and it is misleading. It is really a
bill about second-guessing the Fed on monetary policy, giving
authority to write a report about the deliberations on monetary
policy. I think that is counterproductive. But in any case, it
is not suggested by the title, ``Audit the Fed.''
Mr. Green. Thank you.
Moving to another part of your testimony, you indicate
that, in your opinion, the greatest, biggest--and that is the
way I am reading it--in your opinion, the greatest, biggest
danger to our long-run economic health is political gridlock.
Would you elaborate on this, please?
Ms. Rivlin. I do, and I think particularly the budgetary
gridlock. I happen to be one who thinks that we should invest
heavily, publicly and privately, in the growth of our economy.
That is going to mean infrastructure. It is a scandal if we
can't get an infrastructure bill passed when it is bipartisanly
supported in the Congress. I believe it means investment in
science and investment in skills.
But all of those things cost money and would add to the
debt. So we have to pair that set of investments with longer-
run control of the rise of entitlements and tax reform that
will give us both a fairer, more pro-growth tax systems, and
more revenues.
Mr. Green. And, finally, on the last page, your last four
words are, ``Leave well enough alone.'' Would you care to
elaborate? Perhaps you have already covered it, but it might
serve us well to hear you explain.
Ms. Rivlin. I was referring there to the conduct of
monetary policy. It is clear, and it has been clear on this
panel that there are different views about monetary policy. But
I think the Fed is being very transparent about what it is
doing and what dilemmas it faces, genuine dilemmas, on what to
do next on monetary policy, and I would not interfere with the
deliberations on monetary policy. That would be my advice to
the Congress.
Mr. Green. Thank you very much, Mr. Chairman. I yield
back.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentlelady from Utah, Mrs.
Love, for 5 minutes.
Mrs. Love. Thank you very much.
Thank you for being here.
Ms. Rivlin, you have spent part of your distinguished
career as a Vice Chair of the Federal Reserve Board, so I want
to avail myself and the committee of the value of your
experience.
As you know, the Federal Reserve has come a long way, I
agree with you, in the past 2 decades in improving transparency
regarding monetary policy. The three ways that I have seen are:
the Federal Open Market Committee publishing its decisions
following policy meetings, adding to its statement the votes of
individual members; issuing forward-looking guidance; and more
recently, the Fed Chair conducting press conferences after
every FOMC meeting.
Meanwhile, my biggest concern is that there hasn't been
similar progress improving the transparency of the Fed's
regulatory policies. In fact, some would argue that the Fed has
become more opaque, more secretive with regards to its
regulatory policy. Do you agree with that? And if so, how would
you explain the Fed's reluctance to achieve similar
transparency on the regulation side?
Ms. Rivlin. I think Dodd-Frank is a work in progress.
Everybody is trying to figure out how to make it work. The
Fed's primary responsibility is rightly, in my opinion, to
focus on systemic risk and how to avoid another 2008 where we
did the wrong things for quite a long time and then were
suddenly faced with this crisis. But some of the things we have
talked about here are judgment calls, how big does an
institution have to be to be systemically important?
Mrs. Love. Okay. So I can actually identify three major
problems with the Fed's lack of transparency regarding its
regulatory powers. The first is confusion: Regulatory
institutions don't know the standards by which they are being
evaluated. We have heard most recently from small banks
regarding the implementation of the Volcker rule, Basel III
requirements, and from larger banks with regard to the stress
test and recently submitting living wills or plans by which
large banks can be dismantled in the event of failure.
The second I have seen is that confusion among the banks
can undermine safety and soundness, defeating the whole purpose
of regulation in the first place.
And third, a lack of transparency that undermines our
ability in Congress to perform our oversight duties. We can't
see what is going on. We can't actually offer any thoughts or
help on that.
Do you agree with any of those identified problems? And can
you tell us if this is something that we can improve upon?
Ms. Rivlin. I agree with many of the problems. This is
part of what I meant by saying Dodd-Frank is a work in
progress, that we are trying to figure out how to do it right.
With reference to the discussion that we had earlier about
stress tests, there are no perfect stress tests, but they do
serve a useful purpose. I think within the financial
institution, if they know they are going to have to answer a
lot of what-if questions, they are going to worry about it a
lot more.
So I think we just have to keep working on those. I am not
sure how the Congress can help. That is a very good question.
You can keep asking questions. But I think that is about the
limit of what you can do.
Mrs. Love. I wasn't going to bring this up, but I use
things in analogies all the time. I think that is the best way
to get a point across. As a parent, I have dealt with sick
kids. Whenever they have a fever, we want to make sure that we
help out as much as possible, so we would give them a dosage of
Tylenol.
There isn't anyone here who would argue that we had a
problem that we needed to fix. But sometimes when you give too
much of a medicine, you actually end up doing the opposite. In
other words, if you give the child too much Tylenol, they can
go into a coma.
And there are times where I look and see what we are doing
and how much it is actually putting our economy into a coma,
what we are doing to actually help the economy. There are times
where our regulatory agencies have actually done the opposite
in terms of creating banks, creating such large regulatory
burdens that we have created big banks, which is what we have
tried to avoid in the first place.
So, again, we have to make sure that we have the right type
of dose. And that is why Congress is here to help, because it
is a balance.
Ms. Rivlin. I think that is right. And I think in the wake
of a huge financial crisis, there is going to be a tendency to
overregulate. And that is probably a price worth paying for a
while, but we have to be very careful not to overregulate.
Mrs. Love. Certainly not at the expense of putting our
economy into a downward spiral.
Chairman Duffy. The gentlelady's time has expired.
Mrs. Love. Thank you.
Chairman Duffy. The Chair now recognizes the gentleman
from Texas, the chairman of the full Financial Services
Committee, Mr. Hensarling, for 5 minutes.
Chairman Hensarling. Thank you, Mr. Chairman. And thank
you for calling this hearing with this outstanding panel. And I
don't often use that phrase.
I am very happy that you all have agreed to testify here. I
am sorry more Members, particularly on the Minority side, did
not take advantage of the hearing.
Typically, I don't choose to speak at subcommittee
hearings, wanting other Members to have their opportunities.
But given that there are no other Members in the queue, I just
wanted to explore in a little bit more depth the concept of Fed
independence vis-a-vis the Fed reform bill that was passed in
this committee in the last Congress. And I think the Audit the
Fed provision, which has, frankly, been kicking around for
several Congresses, was brought up as well.
And I guess I am trying to figure out exactly how asking
the Fed, I guess to use your term, Dr. Taylor, to reveal their
strategy on top of their goals is somehow interfering with
their independence, if they get to set the monetary policy rule
convention strategy, if they get to change it, deviate from it;
they just have to come and testify in public about it.
Do you have any concerns about that legislative provision
somehow interfering with the independence of the Fed in the
conduct of monetary policy, separate and apart from every other
new responsibility Dodd-Frank has now added to their plate?
Mr. Taylor. No, I don't have a concern about that. I think
it is, in a sense, my experience in government, it is the other
way around. If you have a clearly enunciated set of principles
or procedures, then that reduces the chance of giving in to
somebody who is asking you to do something special, whether it
is outside of government or inside of government. I think it is
very, very important.
I think also the history of the ebbs and flows of Fed
independence, de facto independence, frequently is related to
the Administration, not the Congress. So it seems to me there
shouldn't be a concern about independence as that legislation
is currently constructed.
Chairman Hensarling. I think we all know that the
Governors on the Board of Governors have 14-year terms, and the
Fed has an independent funding stream. So I think, Dr. Rivlin,
you used the phrase that the Audit the Fed would simply allow
Congress to second-guess monetary policy decisions. I think I
heard you say that. I guess I would question then, what is
oversight? Does oversight interfere with the Fed's
independence? We certainly second-guessed the SEC, CFTC, and
the CFPB. It is kind of our job around here in oversight.
So are these particularly overly sensitive, thin-skinned
people who serve on the FOMC? Or how does it interfere with
their independence if the GAO is able to audit after the fact a
monetary policy decision for people who have 14-year terms and
an independent funding stream?
Ms. Rivlin. I haven't actually understood exactly what
this Audit the Fed bill wants the GAO to do. It is very
obscure. But I think it is to write a report on what
deliberations the Fed went through and how they made monetary
policy. And I don't think you learn anything very interesting
from that. The Fed doesn't have--
Chairman Hensarling. But I guess, Dr. Rivlin, the question
is, does it interfere with their independence?
Ms. Rivlin. I think that having another group of people in
there writing a report about how these deliberations unfolded
and what they did is likely to become quite political, and I
think it is unnecessary and not a good idea.
Chairman Hensarling. I'm sorry. But in the remaining time,
Dr. Calabria?
Mr. Calabria. I don't see it as interfering with their
independence. And certainly we don't see that in terms of GAO
audits of the SEC or the CFTC, or these other agencies; they
don't sit around and look at every word. As a former Banking
Committee staffer, I would certainly say, to me one of the hard
parts of the job was to help Members of Congress understand how
programs worked. And so one of the real values of GAO is to
explain to Congress how government programs work.
Chairman Hensarling. Quickly, Dr. Kupiec, same subject?
Mr. Kupiec. No, I can't. I think having to explain your
policies to an independent agency who writes a report focuses
the mind. So I can't see how it would affect their independence
in any way.
Chairman Hensarling. Quickly, Dr. Taylor, in the time that
I no longer have.
Mr. Taylor. I guess I have to agree with my two
colleagues.
Chairman Hensarling. Thank you, Mr. Chairman.
Chairman Duffy. The gentleman yields back.
I would like to thank our witnesses again for your
testimony today. This was an informative and enlightening
hearing. Thank you.
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.
Without objection, the hearing is now adjourned.
[Whereupon, at 11:45 a.m., the hearing was adjourned.]
A P P E N D I X
July 14, 2015
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