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+
+ - CAN MONETARY POLICY REALLY CREATE JOBS?
+
+[House Hearing, 112 Congress]
+[From the U.S. Government Publishing Office]
+
+
+
+
+ CAN MONETARY POLICY REALLY CREATE JOBS?
+=======================================================================
+
+ HEARING
+
+ BEFORE THE
+
+ SUBCOMMITTEE ON
+
+ DOMESTIC MONETARY POLICY
+
+ AND TECHNOLOGY
+
+ OF THE
+
+ COMMITTEE ON FINANCIAL SERVICES
+
+ U.S. HOUSE OF REPRESENTATIVES
+
+ ONE HUNDRED TWELFTH CONGRESS
+
+ FIRST SESSION
+
+ __________
+
+ FEBRUARY 9, 2011
+
+ __________
+
+ Printed for the use of the Committee on Financial Services
+
+ Serial No. 112-3
+
+
+
+[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
+
+
+
+ U.S. GOVERNMENT PRINTING OFFICE
+64-552 PDF WASHINGTON: 2011
+____________________________________________________________________________
+For sale by the Superintendent of Documents, U.S. Government Printing Office,
+http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). E-mail, [email protected].
+
+
+ HOUSE COMMITTEE ON FINANCIAL SERVICES
+
+ SPENCER BACHUS, Alabama, Chairman
+
+JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
+ Chairman Ranking Member
+PETER T. KING, New York MAXINE WATERS, California
+EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
+FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
+RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
+DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
+WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
+JUDY BIGGERT, Illinois BRAD SHERMAN, California
+GARY G. MILLER, California GREGORY W. MEEKS, New York
+SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
+SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
+RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
+PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
+JOHN CAMPBELL, California JOE BACA, California
+MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
+KENNY MARCHANT, Texas BRAD MILLER, North Carolina
+THADDEUS G. McCOTTER, Michigan DAVID SCOTT, Georgia
+KEVIN McCARTHY, California AL GREEN, Texas
+STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
+BILL POSEY, Florida GWEN MOORE, Wisconsin
+MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
+ Pennsylvania ED PERLMUTTER, Colorado
+LYNN A. WESTMORELAND, Georgia JOE DONNELLY, Indiana
+BLAINE LUETKEMEYER, Missouri ANDRE CARSON, Indiana
+BILL HUIZENGA, Michigan JAMES A. HIMES, Connecticut
+SEAN P. DUFFY, Wisconsin GARY C. PETERS, Michigan
+NAN A. S. HAYWORTH, New York JOHN C. CARNEY, Jr., Delaware
+JAMES B. RENACCI, Ohio
+ROBERT HURT, Virginia
+ROBERT J. DOLD, Illinois
+DAVID SCHWEIKERT, Arizona
+MICHAEL G. GRIMM, New York
+FRANCISCO R. CANSECO, Texas
+STEVE STIVERS, Ohio
+
+ Larry C. Lavender, Chief of Staff
+ Subcommittee on Domestic Monetary Policy and Technology
+
+ RON PAUL, Texas, Chairman
+
+WALTER B. JONES, North Carolina, WM. LACY CLAY, Missouri, Ranking
+ Vice Chairman Member
+FRANK D. LUCAS, Oklahoma CAROLYN B. MALONEY, New York
+PATRICK T. McHENRY, North Carolina GREGORY W. MEEKS, New York
+BLAINE LUETKEMEYER, Missouri AL GREEN, Texas
+BILL HUIZENGA, Michigan EMANUEL CLEAVER, Missouri
+NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
+DAVID SCHWEIKERT, Arizona
+ C O N T E N T S
+
+ ----------
+ Page
+Hearing held on:
+ February 9, 2011............................................. 1
+Appendix:
+ February 9, 2011............................................. 43
+
+ WITNESSES
+ Wednesday, February 9, 2011
+
+Bivens, Josh, Ph.D., Macroeconomist, Economic Policy Institute,
+ Washington, D.C................................................ 13
+DiLorenzo, Thomas J., Professor of Economics, Sellinger School of
+ Business, Loyola University, Baltimore, Maryland............... 9
+Vedder, Richard K., Distinguished Professor of Economics, Ohio
+ University..................................................... 11
+
+ APPENDIX
+
+Prepared statements:
+ Paul, Hon. Ron............................................... 44
+ Bachus, Hon. Spencer......................................... 47
+ Huizenga, Hon. Bill.......................................... 49
+ Bivens, Josh................................................. 51
+ DiLorenzo, Thomas J.......................................... 72
+ Vedder, Richard K............................................ 77
+
+
+ CAN MONETARY POLICY REALLY CREATE JOBS?
+
+ ----------
+
+
+ Wednesday, February 9, 2011
+
+ U.S. House of Representatives,
+ Subcommittee on Domestic Monetary
+ Policy and Technology,
+ Committee on Financial Services,
+ Washington, D.C.
+ The subcommittee met, pursuant to notice, at 10:04 a.m., in
+room 2128, Rayburn House Office Building, Hon. Ron Paul
+[chairman of the subcommittee] presiding.
+ Members present: Representatives Paul, Lucas, Luetkemeyer,
+Huizenga, Hayworth, Schweikert; Clay, Maloney, and Green.
+ Ex officio present: Representative Frank.
+ Also present: Representative Renacci.
+ Chairman Paul. This hearing will come to order.
+ I want to welcome everybody today, our guests as well as
+our Members.
+ And I think we will go ahead and introduce our Members now,
+and those who aren't here, we can do it later on.
+ Before I introduce our side, the members on this side, I do
+want to ask unanimous consent for a statement to be inserted
+into the record from Spencer Bachus. He is not here today. He
+would have liked to have attended, but he had to attend a
+funeral.
+ Also, I would like to just mention those individuals who
+are here.
+ First, we have Congressman Lucas from Oklahoma. He is an
+old hand at this. And I think sitting next to him is Blaine
+Luetkemeyer from Missouri.
+ Welcome.
+ And I think we have a guest who is not a member of the
+subcommittee, and that is Jim Renacci from Ohio.
+ As others come in, we can recognize them.
+ I will defer at the moment here to the ranking member to
+introduce his Members who are here.
+ Mr. Clay. Thank you, Mr. Chairman.
+ First, let me congratulate you on your election as chairman
+of the subcommittee. And I look forward to working with you in
+the 112th Congress.
+ Joining us today is the overall ranking member of the
+Financial Services Committee, the gentleman from Massachusetts,
+Mr. Barney Frank. And I want to thank him for being here today.
+ Also with us is a fellow Texan of yours, Mr. Al Green, who
+represents the City of Houston. And thank you for being here.
+ And, of course, I am William Lacy Clay of Missouri.
+ Chairman Paul. Thank you very much.
+ I do want to also welcome the Congressman and ranking
+member from Massachusetts. We have worked in the past on many
+of these issues, to the surprise of some people at times. But I
+am glad he is attending today.
+ Mr. Frank. Thank you, Mr. Chairman. I would add, to the
+surprise and occasional dismay of other people.
+ Chairman Paul. But the reason I said kind words is I expect
+him to behave today. That is all.
+ I would like to ask unanimous consent that all the
+statements of any member can be admitted into the record. If
+there is no objection, they will be admitted.
+ Oh, and I do need to ask unanimous consent for Jim Renacci
+to sit with us today.
+ No objection is heard.
+ I would like to go ahead and start with an opening
+statement, and then I will defer to the other Members who care
+to make statements, as well.
+ Today, we are talking mainly about unemployment. And, to
+me, this is a very significant issue that we all care about. I
+have not yet met anybody in the Congress or anywhere who thinks
+we shouldn't do something about it, so it is unanimous.
+Unemployment is too high, and the goal is to keep unemployment
+low and employment high. And this would make everybody happy.
+ But the disagreement seems to come from trying to
+understand how we got unemployment and what we should do about
+it. And I have argued that if you don't know exactly why we
+have unemployment, it is very hard to come up with a solution.
+ That is the purpose of these hearings, at least initially,
+to try to understand the ramifications and especially the
+connection of unemployment to monetary policy. Because people
+are thinking more about the Federal Reserve policy today than
+ever before. And everybody does have opinions. Some people
+think there is too much easy money and credit and interest
+rates are too low, and others complain on the other side and
+say that we need more of it, we need more expansion of credit
+and we need more spending.
+ So that is where the disagreements are. But I think there
+should be a lot of goodwill here in the goal of finding out
+just what causes our problems and what we can agree on and what
+we can do about it.
+ Between 2001 and 2010, we had a population growth of 26
+million people. Yet, at the end of that decade, we had 2.3
+million less people employed. So these numbers aren't very
+encouraging. It is terrible that there are 2.3 million people
+not employed, but I think it might even underestimate the
+problem since we had such a big population growth.
+ Just in the last 3 years, or between 2007 and 2010, we had
+7 million jobs lost. I do know that we have had some increase
+in jobs in the last year, but we are still way behind the
+curve.
+ But even with the job increase, we here in Washington, the
+combination of the Fed and what the Congress has done, we
+probably have pumped in $4 trillion. And if you look at the new
+jobs we have created, I would say they are very, very expensive
+jobs. I imagine we could have given everybody $60,000 or
+$70,000, maybe $100,000--I haven't done the calculation--just
+given them the money and they would have been better off. And
+that, of course, would have satisfied the people who say we
+have to stimulate spending; the money would be there. But,
+instead, the money went in different places, and the
+unemployment rates haven't dropped.
+ Another problem I see when we deal with the unemployment is
+sometimes we get confused on how we measure it. The lead figure
+from the Bureau of Labor Statistics comes up every month, and
+they tell us that unemployment is 9 percent. And, oh, it is
+down from 9.5 down to 9; there is a great recovery going on.
+But the people don't feel that way. The unemployment rate is
+still very high.
+ And if you look to some of the private sources of measuring
+unemployment, you find out that unemployment may well be much
+higher. Even the government statistics reveal that if you count
+all the people who are just partially employed or working part-
+time on weekends, that number can jump to 16 or 17 percent. But
+then if you include all those individuals who have given up
+looking for work, there are some who report that the
+unemployment rate could be 22 or 23 percent, reaching almost
+the height of the Depression.
+ So I would encourage all of us to think more seriously
+about how we measure unemployment, and if this is a real
+problem, that we ought to do something about defining how to
+measure unemployment.
+ I think in this discussion today, certainly we will be
+thinking about the results, the inefficiency of the Federal
+Reserve, because they have had a mandate, and the Congress gave
+them a mandate, and the mandate is that we should have stable
+prices and high employment. I can produce some statistics, and
+maybe later on will, to show that prices really aren't all that
+stable. And, certainly, unemployment reflects a failure. If
+that is their job, they didn't do a very good job. They haven't
+been very efficient in producing jobs.
+ So these are the things we want to talk about and try to
+resolve and then see what needs to be done. Because, like I
+said, who wants high unemployment? Nobody wants high
+unemployment. We want to get people employed. I work from the
+assumption that there is a direct connection between monetary
+policy and the business cycle, and, therefore, we should pay
+more attention to it.
+ Now I would like to yield to the ranking member, Mr. Clay.
+ Mr. Clay. Thank you, Mr. Chairman.
+ We were all privileged to witness President Obama's
+stirring State of the Union Address. And part of his uplifting
+message was an appeal for all of us to find common ground in
+order to move our Nation forward. That applies here at home and
+around the world, as well.
+ But I am amazed that some of my colleagues in the Majority
+may have taken that concept a little bit too far. I never
+thought that I would see the day when allegedly conservative
+members of the Republican Party would side with the People's
+Republic of China over the best advice of the Chairman of the
+Federal Reserve. The Republican assertion that the Fed's
+actions to infuse the money supply in order to hold down
+interest rates and lower unemployment will somehow harm our
+currency is absolutely wrong.
+ The congressional mandate for the Federal Reserve is really
+a two-sided coin. The Fed has a mission to both maintain stable
+prices and to foster conditions that promote job growth. If we
+expect this recovery to continue, we need to support both sides
+of that equation.
+ As Chairman Bernanke has testified previously, this
+recession was unlike other post-war economic downturns. And I
+am thankful that the President, along with our congressional
+leadership and in coordination with the Federal Reserve, acted
+courageously to prevent a second Great Depression and to
+preserve the American middle class.
+ Over the last 19 months, with the help of the Federal
+Reserve's wise monetary policy, corporate profits have soared,
+financial markets have stabilized and regained much of the
+value equities that was lost, and the private sector has
+created more than 1 million new jobs. And we still have a long
+way to go, but that is more new job creation than during the
+entire two terms of the Bush Administration.
+ While we strive to restore our economic security, fear of
+future inflation is not today's most important problem. In
+fact, the core inflation rate is still near 1 percent. The real
+danger is if we impede the money supply; then deflation is next
+in the economic chain.
+ We see real growth and recovery in almost every sector of
+the economy, in part because of the Fed's actions.
+Manufacturing is up, orders for durable goods are up, and car
+sales are better than expected, although too few, which is why
+we cannot let up now. There is no doubt that the Fed's prudent
+actions to carefully expand the money supply were appropriate,
+and they are helping put Americans back to work.
+ I am not concerned about what the Chinese, the Brazilians,
+or the Europeans think about our monetary policy, especially
+when some of those who are complaining the loudest are guilty
+of manipulating their own currency to hamper American exports,
+which cost jobs here at home. The current monetary policy
+supports job creation here in America. Here in Congress, we
+have no higher priority.
+ I thank you, and I yield back the balance of my time.
+ Chairman Paul. I thank the gentleman.
+ I would like now to yield to Congressman Luetkemeyer for
+his opening statement.
+ Mr. Luetkemeyer. Thank you, Mr. Chairman. Thank you for
+holding the hearing. And I am pleased to serve on the
+subcommittee and glad to see that we are focusing on the most
+important issues facing our constituents: jobs.
+ Since 1977, the Federal Reserve has been charged with two
+principal missions: controlling inflation; and maximizing
+employment. Despite recent attempts by the Fed, unemployment
+continues to hover at 9 percent for the 8th consecutive month,
+and the economy is still struggling, leaving one to wonder if
+the Fed is capable of affecting either or have they mismanaged
+the situation.
+ Then there is the question of whether the Fed should remain
+to have a dual mandate. And that one has been continually
+debated since 1977. It is unclear whether this dual mandate
+does much of anything to promote job growth.
+ Take, for example, Chairman Bernanke's quantitative easing
+plan. When first presented with the Fed's plan, Americans were
+told that this would be the vehicle to keep interest rates low
+in order to promote job growth and investment. By injecting
+hundreds of billions into the American financial system, the
+Fed sought to promote affordable business investment and
+economic recovery. This was a bold step, one that could
+ultimately our recovery by contributing to inflation. It is my
+hope that the $600 billion QE2 will promote lending and
+stimulate growth.
+ At the same time, I am concerned that the Fed and other
+Federal regulators seem to be ignoring a key problem: excessive
+regulation along the lines of a lack of forbearance among
+examiners. As a former bank examiner, I believe the lack of
+responsible forbearance practiced by our regulators is
+imprudent. Time after time, I have heard from Missouri bankers
+who are troubled by increasing pressure from examiners to
+shrink their portfolios, even when the loans are performing.
+ I fully support prudent financial regulatory oversight, but
+it is not in our best interest to promote economic policy that
+denies credit for viable projects and forces performing
+borrowers into insolvency.
+ Sound monetary policy will play a role in restoring our
+Nation's economic stability. We need to energize the private
+sector and get the government out of the way by creating a
+regulatory environment that protects the American people while
+promoting economic expansion.
+ With that, Mr. Chairman, I yield back. Thank you.
+ Chairman Paul. I thank the gentleman.
+ I would now like to yield to the ranking member of the full
+committee, Mr. Frank, for an opening statement.
+ Mr. Frank. Thank you, Mr. Chairman.
+ And I would begin by saying I agree with the comments just
+concluded. We have suffered from excessive rigidity on the part
+of the regulators. We have, on a bipartisan basis, over the
+past few years, the past year in particular, talked about the
+problem of mixed messages coming from Washington, of the top
+regulators saying they want to encourage lending but of our
+being told by bankers that they are encountering a great deal
+of excessive rigidity. And we will, I hope, continue to press
+for a reasonable approach on the part of the bank examiners.
+ And we also have been engaged in conversations with the
+accounting board so that banks are not forced to take steps
+that are artificial and lock in a temporary problem, with a
+reduction in lending.
+ But on the subject of today's hearing, I was, as the
+gentleman from Missouri was, surprised to see many of my
+Republican colleagues here and former members of Republican
+Administrations criticizing the Federal Reserve's quantitative
+easing partly because it was unfair to foreign countries. As
+the gentleman from Missouri pointed out, we had people
+explicitly agreeing with foreign critiques, saying that, among
+other things, what was wrong with what the Federal Reserve was
+doing was it was damaging the currencies of other countries.
+And as he noted, the People's Republic of China, in particular,
+was helping organize opposition to the Federal Reserve.
+ Let's be very clear: Being accused of currency manipulation
+by the People's Republic of China is like getting a lecture on
+family planning from the Octomom. This is a country which has
+engaged in very serious and significant and systematic
+manipulation of its currency to our economic disadvantage.
+ In fact, with regard to what the Federal Reserve has done,
+the negative predictions haven't come true. We have not seen
+inflation. We have not seen a great set of losses. We now know
+more about what the Federal Reserve is doing. And I know the
+gentleman from Texas does not think we went far enough in what
+we did last year in the bill, but we did make several steps
+that improved the transparency of what the Federal Reserve
+does. And under the law that we now have in place, no
+transaction between the Federal Reserve and any private entity
+will remain secret forever. There will be a publication of
+every transaction that the Federal Reserve does with any
+private entity, although, in some cases, with a time lag to
+prevent there from being market distortion.
+ But to go back to this, yes, it is true that unemployment
+is still too high. But when you are dealing with economics, the
+question is not simply what the reality is but what the reality
+would have been in the absence of actions, what the economists
+call the ``counterfactual.'' And I think it is very clear that,
+as part of an overall approach, what the Federal Reserve has
+done has helped bring unemployment down below what it otherwise
+would have been, although not to a satisfactory level.
+ But it is very clear that, with regard to the charge that
+it was going to lead to inflation, whether that was going to be
+very costly to the Federal Government, or that the Federal
+Reserve would be engaged in activities which it could not
+unwind, they have all been disproven by the facts. And we do
+have speculation--inflation may be coming later. But there has
+not been an inflationary problem. The problem continues to be
+the lack of employment to catch up with other aspects of growth
+in the economy.
+ And I believe that Mr. Bernanke has been doing, with the
+overwhelming support of the other members of the Federal
+Reserve, including--remember, this is not just Mr. Bernanke.
+There have been a couple of dissents, but the Open Market
+Committee includes other appointees, and it includes Federal
+Reserve Bank presidents. They have most recently been unanimous
+on this. And I think that the effect has been a good one.
+ And I hope that we will, as a bipartisan approach, tell the
+rest of the world that any suggestion that America should be
+constrained in what we do to stimulate jobs in this country
+will be unaffected by their concerns that it might have some
+impact on their own currencies, particularly those whose
+manipulation of their own currencies has been to our
+disadvantage.
+ Chairman Paul. I thank the gentleman.
+ Now, I would like to yield time for an opening statement to
+Mr. Lucas from Oklahoma.
+ Mr. Lucas. Thank you, Mr. Chairman. And I appreciate the
+opportunity to offer an opening statement.
+ I would simply observe, I think, that we all realize that
+the Fed's, in effect, running the printing presses perhaps is
+the best policy alternative they have there right now in this
+situation. But if you believe that price stability ultimately
+is what the economy needs to be rational and make decisions and
+grow for the long-term period, then you have to ask the
+question: By dramatically increasing the supply of money--yes,
+the volatility, the circulation of the currency, of money
+through the economy slowed dramatically, so that increased
+supply has been offset by the reduced activity has provided
+price stability or close to it.
+ But if the Fed didn't see this mess coming in the
+beginning, will they see the inflation side in time also? If
+they didn't see this mess coming, will they see the inflation
+cycle starting up in time, the recovery in time to turn off the
+printing press, to shrink the supply, to offset the increased
+speed of circulation before we get into inflation? I am not
+sure, based on past history, that their vision in the future is
+going to be any better than it was in the past.
+ That, I think, is the question. Not so much what other
+countries think, but will we, by the printing press, cause more
+problems in the future than we can overcome?
+ I appreciate the opportunity to hear our witnesses, Mr.
+Chairman.
+ Chairman Paul. I thank you.
+ I would like to now yield for an opening statement to Mr.
+Green from Texas.
+ Mr. Green. Thank you, Mr. Chairman. I thank the ranking
+member, as well, and I thank the witnesses for appearing. And,
+of course, I thank the ranking member of the full committee,
+the Honorable Barney Frank.
+ Mr. Chairman, I would like to start on a positive note and
+say that I concur with you 1,000 percent; we do have to
+ascertain what the cause was if we are to truly find a
+conclusion as to how to resolve the problem. We may differ on
+what the cause is, but I do agree that we have to know what the
+cause was.
+ And I would also concur with you that U6 is a good
+indicator of what the unemployment rate really is when you add
+all of those who are marginally employed. QE1 and QE2 are
+important because they have infused capital into the economy.
+But when we look at the cause and we connect these two, we find
+that we have to ask ourselves, was the cause a lack of
+regulation or was it overregulation? I suspect not, in terms of
+over. Was it a case of regulators not really regulating? Was it
+the exotic products? If it was the exotic products, why were
+the exotic products allowed to exist in the first place?
+ So there are plenty of questions to ask, and I plan to ask
+some of the witnesses today.
+ But with reference to the inflation, I believe that the
+chairman has embarked upon a path that is going to help us have
+a softer landing than we would have but for the QE1 and QE2.
+Without them, it is counterfactual, but there are economists
+that tell us that we would have a landing that may have been a
+crash, and it may have been devastating for the economy, much
+more so than where we are now.
+ I thank you for the time. I look forward to hearing from
+the witnesses. And I yield back.
+ Chairman Paul. I thank the gentleman.
+ Now I would like to yield time to Congressman Huizenga from
+Michigan for an opening statement.
+ Mr. Huizenga. Thank you, Mr. Chairman. I appreciate the
+opportunity. In the interest of time, I have submitted my
+remarks, as well, and will try to shorten it up. And I
+appreciate you holding this subcommittee hearing today.
+ By trade, I am a small-business owner and involved in both
+real estate and construction. And I now represent a district
+currently suffering an unemployment rate well above the
+national average, in Michigan. And one of the hearing's
+topics--and this particular hearing holds special significance
+for us back in Michigan.
+ Earlier this month, the Bureau of Labor Statistics reported
+that the national unemployment rate fell from 9.4 percent to 9
+percent. That does not include the hundreds of thousands who
+have, frankly, stopped looking. That equates to 14 million
+people without a job. While this is a staggering number, in my
+home State of Michigan we are far worse off: 11.7 percent. And,
+again, that is not including those who have stopped looking.
+And in some of the areas in my particular district, along the
+lakeshore, it is well over double the national average.
+ As previously mentioned, I am a small-business owner at
+heart and believe such businesses are the backbone of the U.S.
+economy and provide more than two-thirds of American jobs. I
+understand the universal principles of successful business, and
+it is important that we recognize the appropriate role for
+government in that process. Simply put, the private sector
+creates jobs, not the public sector. And that is ultimately
+where that prosperity lies.
+ It is clear to all small-business owners that responsible
+fiscal policy includes reduced government spending and the
+implementation of friendly tax and regulatory environments.
+They go a long way in creating an atmosphere for success.
+ As we are having this discussion on QE1 and QE2, ultimately
+I believe that they have not proven to be an effective method
+in creating jobs. And I appreciate today us examining the
+effects that the Federal Reserve open market operations have on
+those long- and short-term unemployment rates. And, in
+addition, I look forward to carefully inspecting what potential
+role the Fed policies played in such artificial asset bubbles
+as that of the housing market between 2001 and 2008.
+ So I look forward to today's, I would guess, robust
+conversation on the short-term effects. And I appreciate your
+holding this hearing, Mr. Chairman. So thank you very much. I
+yield back.
+ Chairman Paul. I thank the gentleman.
+ Now, I would like to yield time to Congresswoman Hayworth
+from New York, a new member to the committee.
+ Dr. Hayworth. Thank you, Mr. Chairman.
+ My home district is New York's 19th. It is the Hudson
+Valley. And we have a large portion of our constituency who
+have jobs in the financial services sector. And, frankly, all
+of our citizens are quite directly affected by what the Federal
+Reserve is doing and has done in the past. So I am honored to
+be working on this subcommittee, because examining the role of
+monetary policy in the financial crisis and in our response to
+it is crucial.
+ History shows that an independent central bank that is
+making monetary decisions free of political influence can
+certainly enhance economic growth. It stabilizes the currency.
+That is very important. But that is very different from
+requiring a central bank to be held accountable for its
+decisions and to explain why it is making them. And it is
+certainly incumbent upon us to set that policy for monitoring
+and holding accountable.
+ So that is our role here. And we are in service of the far
+larger goal, as my colleague from Michigan has said, of getting
+Americans back to work throughout the country. So I look
+forward to your testimony regarding how monetary policy has
+affected unemployment. I am sure it has.
+ And I yield back the remainder of my time. Thank you, Mr.
+Chairman.
+ Chairman Paul. Thank you.
+ The Congressman from North Carolina, Walter Jones, has
+arrived. He is the vice chairman of this committee.
+ Would you like to make an opening statement?
+ Mr. Jones. No.
+ Chairman Paul. We would like to announce and celebrate the
+notion that Walter is going to have a birthday tomorrow. So we
+want to wish him a happy birthday.
+ Mr. Jones. Thank you.
+ Chairman Paul. Okay. If we don't have any more opening
+statements, we are going to go to the guests that we have,
+those who are going to testify. I want to welcome all three of
+the individuals here today. And I will read a brief resume of
+each one, and then we will go to the discussion.
+ First, on the left, we have Professor Thomas DiLorenzo,
+professor of economics at the Sellinger School of Business at
+Loyola University in Baltimore, Maryland, and a senior fellow
+at the Ludwig von Mises Institute in Auburn, Alabama. He
+received his Ph.D. in economics from Virginia Polytechnic
+Institute and State University at Virginia Tech.
+ Next, will be Professor Richard Vedder, the Edwin and Ruth
+Kennedy Distinguished Professor of Economics at Ohio University
+and an adjunct scholar at the American Enterprise Institute. He
+received his B.A. in economics from Northwestern University and
+his M.A. and Ph.D. in economics from the University of
+Illinois. He is the author of, ``Out of Work: Unemployment and
+Government in Twentieth-Century America.''
+ And finally, we will hear from Dr. Josh Bivens, an
+economist at the Economic Policy Institute in Washington, D.C.
+He received his B.A. in economics from the University of
+Maryland and his Ph.D. in economics from the New School of
+Social Research.
+ Each will be given time for an opening statement, and their
+full statements will be put into the record.
+ So I will first now defer to Dr. DiLorenzo.
+
+ STATEMENT OF THOMAS J. DILORENZO, PROFESSOR OF ECONOMICS,
+ SELLINGER SCHOOL OF BUSINESS, LOYOLA UNIVERSITY, BALTIMORE,
+ MARYLAND
+
+ Mr. DiLorenzo. Thank you, Mr. Chairman, and members of the
+committee for giving me this opportunity to appear here.
+ To answer the basic question that has been posed by this
+hearing, can monetary policy really create jobs, as an academic
+economist, you are not surprised to hear from me that the
+answer is ``yes and no.''
+ And the reason why I say ``yes and no'' is that the history
+of the Fed has been that it has created boom-and-bust cycles in
+the economy ever since it began its existence in 1914. And so,
+during the boom period, of course, it does create jobs, but the
+jobs that it creates, many of them are unsustainable jobs. I
+can recall hearing that Home Depot, when they laid off 7,000
+people in 1 day, these were jobs that people had invested in,
+they invested their lives, their careers, and then the rug was
+pulled out from under them. That is the sort of thing that
+happens with what we call the artificial boom and bust created
+by the Fed's monetary policies.
+ And the key to it is that the monetary expansion that the
+Fed creates, it sometimes produces price inflation, but that is
+not the only problem. Another part of the problem is that it
+artificially lowers interest rates and induces businesses to
+engage in especially long-term investments that end up being
+unsustainable.
+ In the latest boom-and-bust cycle, that was mostly in real
+estate and everything related to real estate. But it is not
+necessarily just real estate. And so, in this latest cycle
+then, you had people, mortgage bankers and insurance companies
+and everyone related in every way to housing construction
+investing years and years of their careers, and then they are
+out of work; they have to retool.
+ The lower interest rates are not necessarily an unmixed
+blessing to everyone because they tend to reduce savings, and
+savings and investment are the key to productivity growth and
+job creation. And so, the downside of the Fed policy of
+lowering interest rates lower and lower is that it deters
+savings. And savings investment is really the key to having
+sustainable economic growth and job creation.
+ The real damage occurs, then, during the boom cycle of the
+business cycle, where capital is misallocated. Too much of it
+goes into unsustainable areas, such as real estate in the
+latest bout here. And the best part, the good part, if you can
+say there is a good part to this boom-and-bust cycle, is now
+the bust is where the adjustments have to take place. And we
+have to get back to realistic prices, realistic interest rates.
+ One problem the Fed creates, though, is, with its constant
+manipulation of interest rates, it really is an attempt at
+price controls. And I think the economics profession is almost
+unanimous in opposition against price controls. And interest
+rates are prices. And so, when the Fed tries to manipulate
+interest rates, it is really engaging in a policy of price
+controls. And a lot of people in this room, I am sure, remember
+what a disaster that was in the 1970s, with price controls on
+oil and gas.
+ Now, government policies that bail out businesses, which we
+have seen, is really a contradiction of an age-old rule of
+economics with regard to monetary policy. The rule was, in the
+case of a recession like this, it is a good idea for the Fed to
+make credit available to sound businesses that have been
+responsible and made good decisions, but not make more credit
+available to those businesses who have made bad decisions. And
+it is better off to let them go bankrupt, out of business, and
+have those resources be picked up, reallocated by people who
+will make better use of them. But, of course, the Fed has done
+exactly the opposite of that in the recent years.
+ And so, as applied to today's situation, I think a very
+strong case could be made that the cause of the boom was the
+Greenspan Fed's low-interest policies. So the Fed did create
+some jobs with the boom; it is responsible for creating those
+jobs. But I think it is also responsible for the high
+unemployment that we now suffer to a very large extent because
+of the bust that has occurred.
+ It also has created mismatched unemployment, what
+economists used to call mismatched unemployment, which I
+referred to a minute ago, in terms of people investing in jobs
+and careers that ultimately are not sustainable for a long
+period of time.
+ Historically, the Fed, right from the very beginning, as
+soon as it started in 1914, it doubled the money supply by that
+date in 1920 and created the Depression of 1920. It was the
+worst depression in the first year of the Great Depression. And
+a strong case can be made--and I can refer any of the Members
+to literature if they would ask me for it, as to where you can
+read up on how the boom and bust of the 1920s was caused by the
+Fed, as was, I would even argue, the Great Depression was
+ignited by the expansionary monetary policy of the Fed, not the
+restrictive monetary policy of the Fed, that occurred from 1929
+to 1932.
+ I see my time is about up. So, in summary, I will say that
+the Fed's monetary policies do create temporary but
+unsustainable increases in employment, while being the very
+engine of recession and depression, even, that creates
+unemployment in the long run. And it needs to step back, in my
+view, and let the market work and create a lot more stability
+by quitting its attempts to manipulate the price of credit,
+interest rates.
+ Thank you very much.
+ [The prepared statement of Dr. DiLorenzo can be found on
+page 72 of the appendix.]
+ Chairman Paul. I thank the gentleman.
+ I would like to now defer to Professor Vedder for his
+statement.
+
+ STATEMENT OF RICHARD K. VEDDER, DISTINGUISHED PROFESSOR OF
+ ECONOMICS, OHIO UNIVERSITY
+
+ Mr. Vedder. Thank you, Dr. Paul.
+ The one-word executive summary of my answer to the
+hearing's question, can monetary policy really create jobs, the
+one-word answer is ``no.'' And I would agree with Dr.
+DiLorenzo, no, not in the long run, or no, not on a sustainable
+basis.
+ A little historical context: The first decade of this
+century had the lowest rate of economic growth of any decade
+since the Great Depression. Employment growth was the lowest in
+6 decades. Inflation-adjusted equity prices fell sharply.
+ In large part, I think this reflects a multitude of faulty
+government policies, certainly on the fiscal side. Federal
+spending soared, increasingly financed by borrowing. The ratio
+of national debt to output is at a historic high for a
+relatively peaceful period. And on the monetary side, we had
+the worst financial crisis since the Depression, with many
+iconic financial institutions closing their doors or only
+surviving because of Federal bailouts. And despite all these
+huge Federal exertions on both the fiscal and monetary side, we
+have had the weakest recovery going on now in the lifetime of
+most persons in this room.
+ Moreover, I think the huge run-up in the ratio of Federal
+debt to output will be a significant drag on the economy for
+many years and may well lead the Fed to monetize this debt or
+part of this debt, unleashing a wave of inflation that can only
+undermine our economy.
+ Turning to the 2008 fiscal crisis, financial crisis,
+certainly private irrational exuberance may have occurred to
+some extent. The crisis largely resulted from three types of
+government policies, failures.
+ First, as Tom DiLorenzo indicated, the Federal Reserve for
+years prior to the crisis pursued an easy money policy,
+reducing interest rates below levels justified by human
+behavior and market conditions. This led to the artificial boom
+in housing prices.
+ Second, the Feds encouraged imprudent lending practices
+through such things as the Community Reinvestment Act, HUD
+policies going back to the 1990s designed to promote
+homeownership.
+ Third, Fannie Mae and Freddie Mac, government-sponsored
+corporations, promoted totally inappropriate lending practices
+that contributed to the housing bubble and the foreclosure
+mess. Congress blocked attempts to rein in these companies, no
+doubt, frankly, because of the campaign contributions these
+companies made to Members of this body.
+ I am an economic historian. And both economics and
+historical experience demonstrate that Federal intrusions into
+economic activity are counterproductive. Some textbooks even
+talk about the ``policy ineffectiveness theorem.'' Aggressive
+deficit spending and Federal Reserve monetary expansion led to
+stagflation in the 1970s. Japan went on a huge binge of
+stimulus spending in the 1990s, and economic growth virtually
+ground to a halt. The excesses of the European welfare state
+and its funding are causing crises all over the European Union,
+from Ireland to Greece. The stimulus plans of the Obama
+Administration were accompanied by rising, not falling,
+unemployment. Bailouts and ``too-big-to-fail'' policies have
+created a huge moral hazard problem. The Federal Reserve has
+engaged in huge purchases of government long-term bonds and
+mortgages to keep interest rates low. But long-term interest
+rates are not falling, as concerns about potential inflation
+justifiably have risen.
+ So, by many indicators, this is the weakest post-war
+recovery, not because we have tried too little, but because we
+have tried too much. The Fed and the government have monetary
+and fiscal time bombs that are threatening both the short-term
+recovery but, more importantly, long-term financial and
+economic stability.
+ So what do you do? I would point out that our economy
+achieved economic supremacy in the world from 1871 to 1914, a
+period of the gold standard, near-stable prices, and no central
+bank. Consumer prices in 1914 were within 10 percent of what
+they were in 1871. We can learn from that experience.
+ To restore monetary stability, ideally we would ultimately
+consider retreating somewhat from the fractional reserve
+banking system we have, where even moderate declines in
+confidence potentially lead to devastating consequences. But
+more immediately, we need to limit monetary growth. And, given
+human weaknesses, probably the best way to do this ultimately
+is having a gold standard or some variant that removes or
+dramatically reduces the discretion of central bankers.
+ But on the fiscal side, politicians, unfettered by rules,
+behave, I would say, like unsupervised alcoholics in liquor
+stores. We need some sort of constitutional restraints on
+government fiscal actions. Practically, changes of this
+magnitude take time, but, in the short run, however, I think
+you could start holding the Fed's feet to the fire. Perhaps,
+for starters, you should establish price stability as the
+single monetary mandate for the Fed. Perhaps you should repeal
+the Humphrey-Hawkins Act and privatize or abolish Fannie Mae or
+Freddie Mac.
+ After that, you can rest on Sunday.
+ [The prepared statement of Dr. Vedder can be found on page
+77 of the appendix.]
+ Chairman Paul. I thank the gentleman.
+ We will move on now to Dr. Josh Bivens for his statement.
+
+ STATEMENT OF JOSH BIVENS, MACROECONOMIST, ECONOMIC POLICY
+ INSTITUTE, WASHINGTON, D.C.
+
+ Mr. Bivens. Thank you. I would like to thank the committee
+and the chairman for inviting me here today.
+ The subject of this hearing is, can monetary policy really
+create jobs? I am going to say the answer is a barely equivocal
+``yes,'' and the equivocation just being it can create jobs as
+long as the economy is performing below potential. And the
+economy is performing below potential today.
+ The argument--I am going to start with just a little bit of
+theory. Of course, theory alone can't end the discussion, so
+then I will talk about some evidence on monetary policy's
+effects.
+ So the theory--sometimes the cause of recessions are pretty
+hard to reconstruct. Not so in what we are now calling the
+``great recession.'' The bursting of the housing bubble led to
+home builders waking up, realized they had massively overbuilt,
+so residential investment collapsed. The 30 percent fall in
+home prices also erased about $7 trillion in wealth from
+household balance sheets, so they predictably radically
+curtailed their spending.
+ These initial shocks then cascaded throughout the economy.
+Businesses stopped investing because customers aren't coming in
+the door. Why would you build a new factory when the one you
+have can't even sell what it is producing?
+ And so, in the jargon--and, for once, the jargon is kind of
+important--the economy suffered a shock to aggregate demand.
+The clear fact that this recession was the result of a shock to
+aggregate demand is key. Americans workers didn't lose their
+skills in December 2007. American factories didn't become
+obsolete in that month. American managers didn't forget how to
+organize production in that month. Nothing changed about the
+American economy's ability to supply goods and services. All
+that changed was the ability of households and businesses to
+purchase them. The erasure of all the wealth from the housing
+bubble was a shock to aggregate demand.
+ So what the Fed tried to do is stabilize economic activity
+by providing a countervailing spur to demand with the levers
+they have. The primary lever they have is short-term interest
+rates. By lowering these short-term rates, or policy rates, the
+hope is that interest rates up and down the term and risk
+structure fall in sympathy. That makes it cheaper for
+businesses to borrow to expand capacity. That makes it cheaper
+for households to borrow to buy new houses, and durable goods.
+It also provides a one-time boost to asset prices. And so this
+decline in policy interest rates is meant to provide a
+countervailing, positive spur to the aggregate demand that was
+quashed by the bursting of the housing bubble.
+ And all this happened as the great recession approached.
+The Fed started cutting these policy rates in August 2007. They
+provided extraordinary support to failing financial
+institutions early in 2008. And about halfway through the great
+recession, the policy rates they controlled had kind of run out
+of ammunition. They were sitting at zero.
+ They could have just stopped there. As the economy was in a
+complete free fall, as the primary parachute they have
+available to them obviously wasn't sufficient, they could have
+stopped there. They didn't. And it is a good thing they didn't.
+They continued to try to find other ways to provide support to
+the economy with the quantitative easing programs.
+ And these interventions worked. If you look at when the Fed
+introduced the Term Asset-Backed Securities Loan Facility, the
+day that was introduced, credit spreads on asset-backed
+securities started to rapidly fall. That was very good for the
+economy. It meant people could actually get credit again.
+ Researchers from the San Francisco Fed say that the
+announcements of both rounds of quantitative easing caused
+interest rates to fall up and down the term structure. Some of
+the members of the committee may have noticed that 30-year home
+mortgages fell to something like 4 percent in the past couple
+of months. Some of us in this room may have even refinanced
+their mortgages. I actually did. It saved me a lot of money,
+and provided a spur to my spending power. That is very good for
+the economy. That is one channel that is supposed to work.
+ Just that channel alone, the ability to refinance, some
+researchers at JPMorgan Chase have estimated that, if all the
+mortgages guaranteed by Fannie Mae and Freddie Mac had been
+able to take advantage of those 4 percent rates we saw a couple
+of months ago and refinance, that would be a permanent $50
+billion spur to spending potential in the economy. That is just
+one channel through which monetary policy can help people start
+spending again, and businesses.
+ And if you look back, you look at studies of what ended the
+Great Depression, Christina Romer, eminent economic historian,
+the former CEA chair for the Obama Administration, she says
+that monetary easing was a key part of what ended the Great
+Depression. I would say she is actually criticized in this view
+by, say, Milton Friedman, probably the most famous conservative
+economist, only because he thinks the Fed should have done much
+more, loosened much more to fight the Great Depression.
+ If you look at Adam Posen, probably the closest observer of
+what happened in Japan in the 1990s, he points to the fact that
+Japan actually had a pretty good recovery from 2002 to 2008
+when they finally started engaging in the unconventional
+monetary easing that the Fed has done during the great
+recession. It was the first time Japan had seen serious growth
+in decades.
+ The Japanese case is also instructive because they had a
+20-year period where they kept the short-term interest rates
+that they controlled, the Bank of Japan, near zero. They
+engaged in lots of quantitative easing. The cumulative
+inflation rate over those 2 decades was less than 5 percent.
+The United States has seen inflation of over 5 percent, or
+close to 5 percent, in a single year in the 2000s. So this idea
+that monetary easing always leads to inflation, no matter what,
+is just not supported by the facts.
+ And so, my time is up, and I just want to say one thing. I
+would say that the Fed has been by far the policymaking
+institution most aggressive in its response to the job crisis
+caused by the great recession. It acted first, it acted most
+aggressively, and it continues to display a real sense of
+urgency about the need to support the economy and create jobs.
+ Thank you for your attention.
+ [The prepared statement of Dr. Bivens can be found on page
+51 of the appendix.]
+ Chairman Paul. I thank the gentleman.
+ We will now go into our question session. Each Member gets
+5 minutes to ask questions.
+ And just to let you know that if the discussion is still
+going on, we will have a second or even a third round of
+questions if you are interested in the subject and you want to
+hang around.
+ First, I will start off with asking Dr. Bivens a question,
+because you have talked a little bit about interest rates and
+how valuable it has been to the economy for the Fed to lower
+interest rates. But isn't it true that there comes a point
+where they can't accomplish that, where the effort to lower
+interest rates doesn't actually lower interest rates?
+ And we may be even entering that period right now. There is
+a lot of monetary inflation right now with QE2, and there are
+signs that bonds aren't doing as well and they may be shifting.
+ What happens to those who agree with your policy? What do
+they do if the more they inflate, the higher the interest rate
+goes? And, in a way, we had that in the 1970s, as well. Then
+what do you do? What is the policy that is necessary to
+counteract that when interest rates are going up when you don't
+want them to go up?
+ Mr. Bivens. A couple of things--one, you mentioned the
+experience of the 1970s. To me, the experience of the 1970s,
+why interest rates were high was because inflation rates were
+high. And so, my best guess over the next couple of years--and
+it is a guess based on a firm historical relationship between
+how much slack is in the economy and inflation rates--we do not
+have to worry about spiking inflation in the economy any time
+in the next couple of years.
+ So your scenario where the Fed continues to ease, maybe
+undertakes even another round of quantitative easing and
+somehow interest rates in the long term start rising, I would
+say they would need to reassess the policy then. But my read of
+the evidence so far is that, with each announcement of the
+rounds of quantitative easing, you have seen a robust fall in
+interest rates across the risk and term structure, which was
+exactly the target. And it has filtered through to more
+spending in the economy.
+ Chairman Paul. I thank you.
+ And I would like to get a comment from Dr. Vedder or Dr.
+DiLorenzo on that subject.
+ Mr. Vedder. Let's first talk about--the QE2 was announced
+on November 3rd. It is now February 9th. What has happened to
+the interest rates on 10-year or 30-year Federal Government
+securities in that interim? My read of the evidence--and I just
+look at the interest rate yesterday versus November 3rd--is
+that the interest rate on 30-year government bonds has risen
+somewhere between 65 and 70 basis points. The interest rates on
+10-year notes has gone up more than 100 basis points. This has
+not moved down. It is not even staying still. It is going up.
+ Now, in that period, we are buying, what, $50 billion of
+bonds a month? We bought several hundred billion--the Fed now
+owns a trillion dollars' worth of long-term securities, I
+believe, or close to it, the better part of that.
+ To me, that is just the evidence. And it suggests that your
+concern, Dr. Paul, is correct, that the increased inflationary
+expectations have overwhelmed the effects, the immediate
+effects the Fed has when it pushes up bond prices when it buys
+securities. So I think your concern is valid.
+ Mr. DiLorenzo. Yes, I agree, that is what we are seeing, is
+inflationary expectations driving up those interest rates. And
+it might not be hyperinflation, but we are beginning to see it.
+And you have seen some of the inflation around the world, too.
+A lot of the U.S. dollars that are in circulation end up
+overseas. And I think there is probably a connection between
+the high food prices that you are seeing in different places
+around the world with this inflation.
+ But that is not the only problem that can be created by
+monetary expansion. It is the misallocation of resources. The
+Fed is creating a different kind of boom with its quantitative
+easing. And no one can predict what will happen, but in the
+next couple of years we could see another bubble. And I think
+it is likely to be much bigger than the housing bubble was. And
+then we will really be in trouble.
+ Chairman Paul. I would like to ask Dr. Bivens first about
+his statement on page 7. He says, in short, the Fed saw the
+economic downturn coming before any other major macroeconomic
+policymaker body. And there have been a lot of others. What do
+you do with the free-market Austrian economists? And there were
+more than a few. How do you dismiss them so easily? Because
+they did predict it correctly.
+ Mr. Bivens. Yes, I would absolutely not say the Fed was the
+first to see it coming of any economist. I have colleagues who
+warned in 2002 that home prices were getting too high. I meant
+to say they were the first major macroeconomic policymaking
+institution. They acted first.
+ There are three big arms of macroeconomic stabilization:
+there is fiscal policy, Congress; there is monetary policy, the
+Fed; and there is exchange rate policy controlled by the
+Treasury. And of those three institutions, the first one to
+start providing lots of easing to the U.S. economy was the Fed.
+ Chairman Paul. Okay. My time is about up, but I just want
+to go on to the next speaker by quoting Mr. Bernanke, and this
+was in the fourth quarter of 2007: ``We may see somewhat better
+economic conditions during the second half of 2008. This
+baseline forecast is consistent with our recently released
+projections, which also see growth picking up.''
+ He had no idea that it was coming. He was so reassuring,
+and he misled so many people. And I just think there is a lot--
+and if I had more time, I would get other comments, but maybe
+later on. But it just seems like the Fed was way behind on this
+whole issue. I would hate to think they were the first ones to
+warn us. I think they were the last ones to even recognize what
+was going on.
+ Okay. And I will now yield to the ranking member, Mr. Clay.
+ Mr. Clay. Thank you, Mr. Chairman. And, again, let me
+commend you for calling this hearing. The causes of
+unemployment and how government and the private sector can
+respond to and mitigate this crisis are extremely important.
+And I thank you for your leadership on this issue right at the
+start of this Congress.
+ Dr. DiLorenzo, you belong to the Austrian school. And we
+don't have time for a debate on various economic theories.
+However, the Austrian school is different from mainstream
+theories in its lack of a scientific method and rejection of
+empirical data. You don't use the scientific method and instead
+employ deductive reasoning. You apply preconceived
+generalizations to your work. You are kind of asking us to take
+your word for it.
+ Without data, without providing verifiable results, it is
+difficult for others to evaluate the merits of your work, and
+we must rely on your body of work itself.
+ Doctor, you are here today representing yourself as an
+economist. However, it has been difficult for my staff to
+locate any recent work of yours as an economist. It seems that
+for the past 15 years or so you have published books, written
+many articles, and given lectures as an historian.
+ The lines among the social sciences can sometimes get
+blurry, and I am not going to quibble about academic
+distinctions. But if your work was on labor history, historical
+patterns of unemployment, even the history of the Federal
+Reserve on monetary policy, I can understand you being here
+today. But I am a little confused. It seems to me that the bulk
+of your work has been in revisionist history about our 16th
+President, Abraham Lincoln, and the Civil War.
+ Also--and this is where my confusion deepens to concern--
+you work for a Southern nationalist organization that espouses
+very radical notions about American history and the Federal
+Government. This organization, The League of the South, has
+been identified as a hate group by the Southern Poverty Law
+Center.
+ Now, the Law Center is an organization that I deeply
+respect, and so naturally this concerns me. The League of the
+South is a neoconfederate group that advocates for a second
+Southern secession and a society dominated by European
+Americans. It officially classifies the U.S. Government as an
+organized criminal enterprise.
+ Dr. DiLorenzo, you are listed on their Web site as teaching
+for their League of the South Institute. A short list of your
+many articles includes: ``More Lies About the Civil War'';
+``The First Dictator-President'', referring to Abraham Lincoln;
+``In Defense of Sedition''; ``Libelist Leftist Lynch Mobs,''
+insensitively using a loaded term to refer to academic
+criticism of a White professor; ``Abe the Mass Murderer'';
+``Hurrah for `Sweatshops'''--I guess you could sort of claim
+that the title at least is somewhat connected or something to
+do with economics; and ``Hitler Was a Lincolnite.''
+ After reviewing your work and the so-called methods you
+employ, I still do not understand your being invited to testify
+today on the unemployment crisis, but I do know that I have no
+questions for you.
+ Let me go to Dr. Bivens.
+ And there are some factual errors in the testimony
+presented here today that I believe need to be corrected.
+First, even though it was suggested that it was the excessive
+expansionary monetary policy of the Fed that caused yet another
+boom-and-bust cycle that spawned the Great Depression, the
+facts do not bear this out.
+ And, according to congressional research, between 1925 and
+December of 1928, the money supply increased at a very modest
+rate of 3.4 percent. Even if we look at a larger timeframe from
+July of 1921 to July of 1929, it grew at a rate of 4.8 percent
+per year. There is nothing particularly rapid about these
+rates, much less anything approaching excessive expansion.
+ Dr. Bivens, can you confirm this for us?
+ Mr. Bivens. The exact numbers, no. But they definitely
+comport with my sense of that period, which is there was no
+excessive monetary expansion before the Great Depression. And
+even again, Milton Friedman, conservative economist, if he has
+a criticism of the Fed during the Great Depression, it is that
+they did not ease quickly enough, they did not provide enough
+monetary support to the economy. So they comport with my sense
+of what happened during that period.
+ Mr. Clay. Thank you for responding.
+ Mr. Chairman, I yield back.
+ Chairman Paul. I now yield to Congressman Jones from North
+Carolina.
+ Mr. Jones. Mr. Chairman, thank you very much, and thank you
+for holding this hearing.
+ I want to thank the panelists.
+ And, Mr. Chairman, about a week ago, I decided that the
+frustration of the American people in the 3rd District of North
+Carolina, which I represent, was so great and their
+disappointment in the United States Congress and things we have
+done--talking about both parties--that I would take it upon
+myself to say, if you will help me with questions for the
+panelists for this whole year--I am delighted to be on this
+subcommittee, by the way--that I will use some of your
+questions when my time comes.
+ So, Mr. Chairman, in a week's time, we got over a thousand
+e-mails from my district. I am going to read two; then I want
+to get to a point:
+ ``Our Congress Members, for the most part, must be the most
+financially illiterate group of men and women on the planet.
+Why would they need a study group on domestic monetary policy
+and technology to figure out you don't print more money to
+create jobs that are backed by virtual money, or funny money? I
+believe we need to fire all these people and get a couple of
+housewives who have been managing their family budget over the
+years without credit cards, lines of credit, and other creative
+ways to rob Peter to pay Paul.''
+ This is a great example of how frustrated the American
+people are. That is why I do think this hearing today is
+important.
+ Let me read the next one; then I want to get to the
+question:
+ ``As an owner of small businesses and a family borrower, I
+have not understood how the Federal Reserve can keep its
+interest rates at almost zero and then make lendable funds more
+available to the banks, while at the same time the banks have
+increased interest rates, decreased lines of credit, and
+restricted availability of loans to high-rated creditors like
+my businesses and other households. I can only see that the
+banks have improved their financial position on the backs of
+small businesses and families.''
+ That basically is going to be my question. I am very
+frustrated; I am sure my colleagues in both parties are, as
+well. What you hear back home is this issue of how the banks
+have been empowered with the Federal Reserve and the other
+agencies so that they are able to swell their financial state
+and, at the same time, they are saying to those of us who are
+creditors, we are going to raise your interest rates on your
+credit cards, we are going to deny you loans because we have a
+certain criteria now.
+ And this is why this country is in deep trouble, and it is
+going to continue in deep trouble. And that is why I think it
+is important that we hold these hearings about monetary policy,
+because the average American is out there strangling to death
+because of things that we do and don't do here in Washington.
+ How would you answer the question to that constituent who
+wrote me that question? Anyone who would like to answer.
+ Mr. Vedder. I think your constituent ought to be made a
+member of the Council of Economic Advisors or something of--it
+wouldn't be any worse than it is now, maybe a little bit
+better.
+ Why are interest rates for the ordinary--why are people not
+borrowing a lot of money now? Is it because--the reason, of
+course, is--why are businesses sitting on $2 trillion in cash,
+roughly, right now? They are sitting on $2 trillion. You can
+have interest--interest rates don't matter. I don't say they
+don't matter. They are not the key thing.
+ They are scared. People are scared. They are scared of a $4
+trillion increase in the Federal debt over the last 3 years.
+The housewife may not be sure why that is bad, but she knows
+that is basically not a good thing to do. She knows that
+printing money and dropping it out of airplanes, or the
+equivalent, which is what the Fed does, will not create jobs,
+will not create wealth. It might temporarily lead to some
+behavioral modifications that leave the appearance of some
+stimulus in the short run, but not in the long run.
+ I happen to like Abraham Lincoln, by the way, and I went to
+the Lincoln Memorial today to read the Gettysburg Address. And
+I noticed that they have torn up--that they have drained the
+reflecting pool. And there is a sign in front of it that says,
+this is part of the stimulus--whatever, the reinvestment--I
+don't remember the name of that thing--reinvestment act. And
+they also had a sign next to it that said, we are going to fill
+it back up again. We can drain the reflecting pool and fill it
+back up again and probably put a few people to work for a day
+or 2, but that doesn't create jobs.
+ People are scared. And banks have partly raised interest
+rates, to get more specific, on some types of credit because
+they feel they have to because of the Dodd-Frank bill. Another
+thing, when they see light at the end of the tunnel, you add on
+more tunnel. Not you, personally, Congressman, but your
+colleagues add more tunnel. And we have added more tunnel.
+ So we have the Dodd-Frank bill that has all kinds of new
+restrictions on banks and financial institutions. They have to
+make up the money somewhere. They are not going to just simply
+say, oh, we are going to let our profits fall to zero, and we
+are going to become a charitable institution, a not-for-profit.
+That is not the way banks operate. So they have raised a lot of
+fees and so forth. So that has added to the frustration.
+ Mr. Jones. Would you like--
+ Mr. Bivens. Yes, could I have a very quick response to
+that, as well?
+ I will say one thing. If you look at the survey of small
+businesses, the National Federation of Independent Business
+recently over the past year, you ask them, what is the number-
+one problem facing you, overwhelming highest response in
+history: sales; there are no customers.
+ And so then the question is, can monetary policy actually
+create some customers for those businesses? And it absolutely
+can. When you saw the ability to refinance mortgages at 4
+percent, that freed up a lot of money for households. When you
+lower interests up and down the term and risk structure, you
+make it much cheaper for businesses who are on that razor's
+edge--``Should I borrow a little money to expand? It is
+uncertain out there''--but you make it much easier for them to
+do that.
+ And the idea that there are inflationary expectations
+driving up long-term rates, there just are not. The clearest
+indicator of inflationary expectations that economists use is
+the tip spread, the spread between inflation index treasuries
+and nominals. That was at historically low levels a couple of
+months ago. Now it is still below 2 percent lower than it was
+at any point during the 2000s. There is just no sign that
+inflationary expectations are out of line and that is what is
+driving anything like long-term rates rising.
+ And then just one last thing. I am no defender of the
+banks, but, actually, if you are worried the banks are having
+too easy of a time by borrowing cheap, short term from the Fed,
+and then raising long rates on what they are lending to their
+customers, quantitative easing actually squashes that spread.
+It actually makes it less hospitable for banks to do that. So
+if you don't like the banks, kind of, riding the easy term
+structure created by what the Fed is doing to short-term rates,
+you should like the quantitative easing program.
+ Mr. Jones. Thank you.
+ Mr. DiLorenzo. Is there time for one more comment on that?
+ Chairman Paul. Go ahead.
+ Mr. DiLorenzo. I would add, since I have written three
+books that include a history of banking, so contrary to what
+Mr. Clay had to say about me, what we have been experiencing is
+what economists call ``regime uncertainty.'' With all the
+uncertainty of the Fed changing policy month by month--the
+threat of huge taxes for socialized medicine, the re-regulation
+of banking with the Dodd-Frank bill--businesses sit back and
+wait because there is so much great uncertainty about the
+future with all of these regulatory changes and tax changes.
+ And that is one of the things that is keeping them from
+lending to businesses. The businesses are putting a lot of
+their business plans on hold. And the economist Robert Higgs is
+best known for research on this whole area of regime
+uncertainty, and I think that is an important thing to factor
+in there.
+ Chairman Paul. I now yield 5 minutes to the Congressman
+from Texas, Mr. Green.
+ Mr. Green. Thank you, Mr. Chairman.
+ I thank the witnesses, as well, again.
+ What we have, apparently, is this philosophical debate
+about how jobs are created. Do millionaires create jobs, or do
+millionaires simply respond to demand and, as a result, they
+facilitate the creation of jobs because there is demand?
+ Smart money doesn't create jobs just because it exists.
+Smart money creates jobs when there is a demand to be met. Is
+that, in essence, what you are trying to say or have been
+saying, Dr. Bivens?
+ Mr. Bivens. Yes, I think that is a fair summary.
+ Mr. Green. And is it true, sir, that jobs and employment,
+that these factors are considered lagging economic indicators,
+employment?
+ Mr. Bivens. That is right. I think that is fair to say, as
+well. The last couple of recessions, you have seen GDP go up.
+ Mr. Green. Right. And while other things will come back at
+a relatively different pace--let's say it this way: Jobs will
+be among the last things that will return, especially when you
+have a sharp downturn in the economy. And it is also fair to
+say that, because of some of the structural changes in the
+economy, there are some jobs that won't return. Is this a fair
+statement?
+ Mr. Bivens. I think we will have a different-looking
+economy coming out of this than we did. We are going to have
+fewer construction jobs when we eventually get out of this and
+get out of the jobs hole. Hopefully we have some more
+manufacturing jobs. So, yes, I think there is something to
+that.
+ Mr. Green. Also, changes in technology. A few years ago, we
+had technology that was greatly different. Something as simple
+as developing film, the technology has changed. So you won't
+have those jobs. Record companies won't have jobs. The
+structure of the economy is changing as well.
+ So I would like for you, if you would, to just do this for
+me. Take a moment and explain, if you would, how the lagging
+indicator of jobs returning, employment, how that will manifest
+itself as we go forward. Is that something that will happen
+immediately, or will we see signs of it?
+ And, also, does it rise and fall based upon people who are
+out of the employment market coming back into the market? Does
+that then cause the job numbers to go up again? And then as
+more people are employed, it comes down again? Please talk
+about it.
+ Mr. Bivens. Yes, you raise a lot of interesting points.
+ First, I will say that the observation that jobs are a
+lagging indicator should absolutely not be taken as
+``everything is fine, and the jobs will come back,'' even at
+the current pace of economic growth. That is not the case. If
+you want jobs to come back really quickly, you need to boost
+economic growth that much quicker. And so I would say monetary
+ease.
+ But, yes, then the other issue is, you are right. If you
+look at the number of jobs lost between 2007 and today, it is
+roughly 7 million. But we should have created well over 3
+million in that time period just to keep pace with population
+growth. Those people who didn't join the labor force over the
+past 3 years will start joining it if jobs start becoming
+available again. And so that means the unemployment rate is
+going to be very, very stubborn in coming down over the next
+couple of years, even if we get some good output growth, some
+good employment growth.
+ But that said, if you look at the agonizingly slow
+recovery, the 2001 recession, or the very slow recovery of
+today compared to the quick recovery of the early 1980s; the
+thing that distinguishes them is that output grew much faster
+in the 1980s. And part of what explains that output growth, as
+I say in my written testimony, is the Fed had a lot of room to
+provide a lot of monetary support to the economy, and they did.
+They cut interest rates by 10 percent. That sparked both output
+and jobs growth.
+ So I think you are right. I think, even as jobs come back,
+the unemployment rate is going to be very, very stubborn
+because of all those jobs that were not created. But we really
+should say we cannot be satisfied with this pace of economic
+growth.
+ Mr. Green. Thank you.
+ Let me quickly respond to something that was said about the
+CRA, and Fannie and Freddie to a certain extent. We do have to
+make a distinction between causes and contributing factors. The
+CRA did not create 3/27s, 2/28s, teaser rates that coincided
+with prepayment penalties, no-doc loans. All of these exotic
+products were not created by the CRA. It may have been a
+contributing factor, Fannie may have been a contributing
+factor, as well as Freddie. But we shouldn't label contributing
+factors as causes.
+ These products that were created were created in an
+environment where you had either a lack of regulation or
+regulators that were not properly adhering to regulations,
+following the law, making others follow the law.
+ Mr. Bevins, could you just comment on this briefly?
+ Mr. Bivens. Yes, I think I agree with all of that. The idea
+that especially Fannie Mae and Freddie Mac were prime drivers
+of the housing bubble just doesn't work when you look at the
+evidence.
+ As the housing bubble gets under way in the early 2000s, as
+home prices go through the roof, and as these exotic mortgages
+come online, Fannie and Freddie hemorrhage market share. They
+lose it to all of the private servicers.
+ They, unfortunately, start to try to get into the game a
+little later in the decade, and they shouldn't have. That is
+clear. But they were not--they were followers. They were
+absolutely not leaders. And so, the idea that the housing
+bubble can be laid at their feet, I think, is just wrongheaded.
+ Mr. Green. Thank you, Mr. Chairman.
+ Chairman Paul. I now yield 5 minutes to Congressman
+Luetkemeyer from Missouri.
+ Mr. Luetkemeyer. Thank you, Mr. Chairman.
+ A while ago, Dr. DiLorenzo, you talked about another bubble
+coming. Can you elaborate on that just a little bit?
+ Mr. DiLorenzo. With all the so-called quantitative easing
+that the Fed is engaging in, it is more of the same policy that
+created the real estate bubble in the first place. And, at that
+time, it reallocated a lot of capital into housing and housing-
+related industries. And so, even if we are not seeing price
+inflation, we have all this credit out there, the potential for
+lending. And, of course, the banks aren't lending as much as a
+lot of people would like to see them lend.
+ And so we can't really predict where the next bubble will
+be, but it was in the stock market--before the housing bubble,
+there was a stock market bubble. And the Fed responded to that
+bubble with the policy of low interest rates that created the
+housing bubble. And so I fear that we are going to have another
+one because of the amount of money that is being put in
+circulation is orders of magnitude greater than what the
+Greenspan Fed did.
+ But no one can forecast or predict what industry it is
+going to hit, and so I am afraid I can't help you there. But I
+am pretty confident that we should be worried about it.
+ Mr. Luetkemeyer. What you are saying, though, is that, as a
+result of the money supply, there will be another bubble,
+because you are putting into the system some sort of an anomaly
+that will cause something else to happen somewhere else, such
+as--
+ Mr. DiLorenzo. Yes. What happened with real estate is the
+low interest rates made it much more profitable to invest in
+long-term investments when interest rates go down. And so, all
+that money and resources is poured into real estate especially,
+and it ended up not being sustainable.
+ Mr. Luetkemeyer. Do you have a best guess as to where it
+may happen next?
+ Mr. DiLorenzo. We have some criteria. Like, one of the
+reasons why I think it happened in real estate and it was such
+a catastrophe was all these new products, new financial
+products, and there were a lot of people who really were
+confused by them.
+ And so, just as a general rule, in industries that are
+relatively new, where there is uncertainty on the side of the
+consumer, that is where the trouble can be. And so that might
+lead to a lot of possibilities. But I can't--I don't have any
+particular industry that I could--maybe Professor Vedder does.
+I don't.
+ Mr. Vedder. I think economists who make predictions are
+foolish.
+ Mr. Luetkemeyer. Are there a lot of Fed economists around?
+ Mr. Vedder. A lot of failing economists?
+ Mr. Luetkemeyer. No. Aren't there a lot of economists at
+the Fed?
+ Mr. Vedder. There are a lot, and there are a lot of
+mistakes that are made. Dr. Bivens mentioned with great
+admiration Christina Romer, whose most famous quote in modern
+times was her quote early in 2009 when she said, ``If the
+stimulus package passes, the unemployment rate will not go
+above 8 percent.'' It is at 9 percent now and has been to 10
+percent.
+ And so, I agree with Tom that we have a ticking time bomb
+out there, and exactly what the shape of the disaster will be I
+don't know. We have these mammoth excess reserves at banks.
+ And Dr. Bivens is actually right, he is absolutely right,
+we haven't had a huge amount of inflation now. And it is true
+people aren't spending a lot of money now. Why aren't they
+spending money? Is it because interest rates are too high? No.
+It is because they are scared. They are just downright scared.
+They are scared because, ``Oh, we don't know this Obamacare,
+what it is going to do to us.'' We have had a regime change.
+People are scared. We are not used to big changes all at once.
+And because of that--but we have the potential for a disaster.
+ Mr. Luetkemeyer. Okay. Very good. Thank you.
+ Dr. Bivens, you made a comment a while ago--you were
+discussing Japan. And they have had many, many influxes of cash
+into their economic system, QE2, 3, 4, 5, 6, whatever. And you
+made the point that it was able, as a result of that, to sort
+of help keep inflation low and interest rates low.
+ My concern is that their economy still is struggling. And
+it has been that way for 15, 20 years. If QE2 is supposed to be
+the end-all, be-all to help us create jobs and get our economy
+going, how do you correlate those two?
+ Mr. Bivens. If you look at Japan, it pretty much had a lost
+decade of the 1990s, and they were sort of riven with internal
+debate about just how aggressive to get with monetary policy.
+And they never actually did, sort of, the unconventional large-
+scale asset purchases that the Fed has been doing. And--
+ Mr. Luetkemeyer. Yes, but didn't they put a lot of money
+into the system, though?
+ Mr. Bivens. They kept interest rates very low, yes.
+ Mr. Luetkemeyer. That is my point. My point is, if we go
+along with the Fed's mindset here and policy of throwing more
+money into the system and we look at Japan as an example, over
+many years and on many QE2s or QE1s or whatever, and it didn't
+really do what we are hoping that this QE2 over here is going
+to do, what is the thought process that would lead one to
+believe that ours is going to be different than theirs?
+ Mr. Bivens. It won't be different. They only saw a real
+recovery between 2002 and 2008 when they started doing the
+QE2s. Before that, they sat at zero, but they did no more. They
+said, we can't do anything else unconventional, you just don't
+do that. Everyone--not everyone--many people said, no, the
+economy needs more.
+ When they finally started doing more on the monetary side,
+they actually saw a pretty decent recovery during 2002 to 2008.
+And then, of course, everybody, globally, went into the great
+recession.
+ Mr. Luetkemeyer. Okay. I see my time is up. Thank you, Mr.
+Chairman.
+ Chairman Paul. Thank you.
+ I want to yield 5 minutes now to Congresswoman Hayworth
+from New York.
+ Dr. Hayworth. I yield my time at this time, Mr. Chairman.
+Thank you.
+ Chairman Paul. Okay. Thank you.
+ I yield 5 minutes to Congressman Huizenga from Michigan. Is
+he not here?
+ Okay. I yield 5 minutes to Congressman Schweikert from
+Arizona.
+ Mr. Schweikert. Thank you, Mr. Chairman, committee members,
+and witnesses.
+ I may be one of those who is a little less interested in
+what is going on now or the last couple of years. I can grab a
+financial paper and read that. What I am trying to get my head
+around is a central bank and the monetary policy as we run it
+as a country for the last, let's call it, 100 years. Does it
+exacerbate the swings and, therefore, in many ways, unemploy
+more people and make the troughs much deeper?
+ For any of you, if someone like myself wanted to sit and
+read and get better educated, where in the literature do I find
+the best scholarly, fairest, and most detailed papers? Let's
+start from the left.
+ Mr. DiLorenzo. There are several treatises on the history
+of money and banking. One of them is authored by Richard
+Timberlake, who has taught economics at the University of
+Georgia for many years. He is retired now. There is another one
+by Murray Rothbard, ``A History of Money and Banking in the
+United States.'' And those are both very good books.
+ And since you are a very busy Member of Congress, that
+sounds like a tall order to begin with, but--
+ Mr. Schweikert. One of the joys of being from Arizona is
+that I have a 5-hour flight both ways.
+ Mr. DiLorenzo. Okay, those are two books I would pick up.
+ But, also, this weekend there is a conference at Wake
+Forest University under the title, ``The Fed Was a Mistake.''
+And there is a professor from the University of Georgia named
+George Selgin who is giving a presentation based on an academic
+paper. And he has looked at the last hundred years of the Fed's
+performance, the very question you are asking. And I can put
+you in touch with Professor Selgin, if you really would like
+to, for your next flight back to Arizona.
+ But he was actually at my university last week and gave
+this presentation, a PowerPoint. And he looked at all the Fed's
+obstensible goals--price stability, unemployment--and makes the
+case that the Fed has, in general, failed, although it has not
+been a dramatic failure, but it was a failure nevertheless to
+stabilize prices and unemployment.
+ Mr. Schweikert. I appreciate it. I know I have only 5
+minutes, so I want to, sort of, drive through this.
+ Mr. Vedder. Congressman, there is a new history of the
+Federal Reserve written by a very distinguished scholar, Allan
+Meltzer of Carnegie Mellon University. It is up through the
+1980s or the 1990s. And it is not a complete history, but it is
+a second volume of a history. He is a very well-renowned
+monetary scholar. I haven't read the book entirely, but I sat
+in on a conversation with him and Chairman Volcker a couple of
+weeks ago at AEI, and it strikes me that it would be a very
+instructive kind of work, as well.
+ Mr. Schweikert. All right.
+ Mr. Bivens. Just quickly, spanning the spectrum of
+ideology, ``A Monetary History of the United States,'' Milton
+Friedman and Anna Schwartz.
+ Mr. Schweikert. Okay, which I actually have.
+ Mr. Bivens. ``Secrets of the Temple'' by William Greider.
+What is that?
+ Mr. Schweikert. No, go on.
+ Mr. Bivens. And I would say an absolute classic and very
+readable, ``Manias, Panics, and Crashes'' by Charles
+Kindleberger, formerly of MIT.
+ Mr. Schweikert. All right.
+ Mr. Chairman, witnesses, when I see monetary expansion in
+the way--let's just take the most current case scenario. And,
+at the same time, I have been spending tremendous amounts of
+time reading about the GSEs and the overhang and the mortgages
+and all the nonperforming debt we have at so many different
+levels.
+ Does this monetary policy end up creating a situation where
+we are not taking nonperforming assets and either writing them
+down or getting them off the books? And does this end up
+creating a huge overhang here that this monetization makes it
+so I can keep them on the books, basically sort of creating
+sort of a flat line?
+ Mr. DiLorenzo. Yes, that is exactly what has to happen, the
+liquidation of all of those bad assets and those bad
+investments. Historically, that is how recessions end. The bust
+period, as I said earlier, of the boom-and-bust cycles that we
+have is really the recovery period where businesses become
+stronger on the way out, at the end of the recession.
+ And the Fed seems to have been doing everything it can to
+delay that process of the liquidation of these bad assets. And
+I think that is a very bad idea.
+ Mr. Vedder. I am going to defer an answer on this because--
+I think Tom is probably right, but I haven't studied the
+specifics of the nonperforming assets closely enough to make an
+informed--
+ Mr. Schweikert. All right.
+ Doctor?
+ Mr. Bivens. I don't think it is--I think it is true that
+some writing down of bad assets is going to be part of a good
+recovery. I have to say, though, I think the Fed's actions by
+avoiding deflation, outright falling prices, is actually going
+to make people climbing out of their debt burdens over the next
+5 to 10 years easier.
+ If you have a mortgage that is fixed at $150,000, and every
+other price in the economy starts plummeting around it, then
+all of a sudden your mortgage payment has just gotten a lot
+more onerous for you. And so I think, by avoiding deflation, it
+is actually going to make the debt overhang less of an
+impediment to recovery in the next 5 to 10 years.
+ Mr. Schweikert. Okay.
+ Mr. Chairman, how much time do I have?
+ Chairman Paul. I think your time has expired.
+ Mr. Schweikert. Oh. And I was just getting to the really
+good questions.
+ Chairman Paul. If you hang around, you will get another 5
+minutes.
+ Mr. Schweikert. All right. Thank you.
+ Chairman Paul. I would like to yield 5 minutes now to
+Congressman Renacci from Ohio.
+ Mr. Renacci. Thank you, Mr. Chairman.
+ I have been a small-business owner for 28 years, and I
+actually created jobs at the age of 24 with very little money
+in the bank. But I did have the opportunity to have banks
+willing to lend me money and the opportunity to create over
+1,500 jobs in my career.
+ I want to ask all three gentlemen on the panel whether they
+believe the new duties given to the Fed in the Dodd-Frank Wall
+Street Reform and Consumer Protection Act will have an effect
+on employment growth. Because I am a believer that the free-
+market system will create jobs. I am a little concerned about
+that. I wanted to hear all three of your opinions.
+ Mr. DiLorenzo. The Fed has a publication that has a title
+something like, ``The Structure and Functions of the Federal
+Reserve.'' And it lists, I think, at least 30 or 40 different
+areas where it regulates different types of financial markets.
+ And for those of you who are businesspeople, you know that
+there is a very big cost involved in that. As Professor Vedder
+mentioned about the Dodd-Frank bill, it is not a free lunch. It
+is very costly to banks to enforce the provisions of that bill,
+and they are going to pass on some of the costs to their
+customers.
+ And so, expanding the prerogatives of the Fed is going to
+add more layers of regulation and make the banking business
+that much more costly. There may be benefits along, but it is
+going to make it more costly and more costly to consumers, as
+well, and more burdensome for businesspeople like yourself, in
+my view.
+ Mr. Vedder. The cause of unemployment is too high a price
+for labor. When labor cost go up too much, employers hire fewer
+workers. It is the law of demand. It is very simple, not very
+complicated. I wrote a book about this, which a lot of people
+have praised to the skies. I thought it was the simplest
+concept in the world.
+ Dodd-Frank, other things being equal, does not lower the
+cost of labor. If anything, it raises costs generally to
+employers, making it difficult to employ workers. So the net
+effect of a mechanism like Dodd-Frank is probably to reduce,
+rather than increase, employment and, thus, increase
+unemployment in the United States.
+ Mr. Bivens. I would say quickly, it is going to have little
+effect on what happens to unemployment.
+ I will make two distinctions here. One, I have been mostly
+talking about, sort of, monetary ease and interest rates and I
+think that the Fed has mostly gotten it right, at least in
+direction. It is true, I do think that the Fed and every other
+institution in the 2000s had too light a regulatory touch. And
+so I think booms and busts are caused by light regulatory
+touches.
+ I think the way that Dodd-Frank empowers the Fed to
+actually provide some tighter regulation, I think that is going
+to be a good thing, reduce boom-and-bust cycles in the future.
+And so I think it is an improvement.
+ Mr. Renacci. Thank you, Mr. Chairman. I yield back.
+ Chairman Paul. I thank you.
+ We will now go into a second round of questioning.
+ I would like to address this question to Dr. Bivens. This
+has to do with the debt that we have and its relationship to
+monetary policy. Even the Chairman of the Fed, Chairman
+Bernanke, has indicated that he thinks debt and deficits are a
+problem and has admonished the Congress to get their budget
+under control.
+ Do you have similar concerns? Is there a limit to how much
+debt we can have and how high these deficits should run? Or is
+that of no concern at all when we are in the midst of a
+recession?
+ Mr. Bivens. I absolutely have concerns over, sort of, the
+long-run debt limits that are on the United States. And I think
+we should definitely move to, sort of, long-run, closer budget
+balance than is currently forecast.
+ I will say, it is not a concern of mine over the next, say,
+2 years. To me, what the economy needs now is spending power,
+support from both the fiscal and monetary side. Some moving in
+the next couple of years to radically reduce deficits and debt
+would be very counterproductive.
+ But, absolutely, in longer-run periods, as unemployment
+returns to a tolerable level, that should absolutely be a
+concern.
+ Chairman Paul. Thank you.
+ I would like to suggest to Dr. DiLorenzo and Dr. Vedder
+that there is a connection between monetary policy and
+deficits. Because if we didn't have the facilitator there, the
+ability of the Fed to buy debt and manipulate interest rates,
+wouldn't there be a self-mechanism where Congress would
+literally be unable to spend the money because interest rates
+would go up? And interest rates--of course nobody wants them
+high and they are bad politics, but wouldn't that be a way of
+holding a check on government?
+ And, really, it isn't just the Congress; it is the fact
+that the monetary system there accommodates the Congress
+because there is a lot of bipartisanship in the Congress.
+Sometimes, there are big-government conservatives who like to
+spend money, and sometimes, there are big-government liberals
+who like to spend money, and there is too much bipartisanship.
+They get together and they spend this money. And they figure,
+if we can get away with it, we are just going to allow the Fed
+to monetize this.
+ And, for a long time, they can get away with it. And they
+have done this, especially since 1971, until they finally got
+this huge bubble that finally burst, and we are in the midst of
+this great recession. For those who are employed, it is a
+depression.
+ But do you agree with that connection, that the Fed has
+something to do with encouraging the Fed to act irresponsibly?
+ Mr. DiLorenzo. I would. I think you hit the nail on the
+head. I would agree completely with that.
+ And, of course, when the Fed gets involved, it reduces the
+perceived cost of government. If you raise taxes to pay for
+government services, it is much more explicit and hits you in
+the face; you get a bill. But when the Fed prints money and
+expands the money supply, it has what economists call a
+``fiscal illusion effect.'' And it makes it that much easier
+for this bipartisanship to occur that you referred to.
+ Chairman Paul. Dr. Vedder?
+ Mr. Vedder. I agree with Dr. DiLorenzo and with your
+analysis, Dr. Paul. And, indeed, in my statement, I was worried
+I was talking a little bit too much about fiscal policy and
+debt, but I was doing it for exactly the reasons you indicated.
+I think there is a real connection.
+ And throughout the history of the Fed, even going back
+before 1951, when the Fed was tied into the Treasury to keep
+interest rates down during the war, the Fed just keeping buying
+bonds and so forth. It was a deliberate policy to help the
+government manage its fiscal affairs. The Fed accommodated it
+by monetizing a lot of the debt.
+ This has been going on and on and on. And it will go on as
+long as Congressmen have to be re-elected every 2 years and as
+long as the Fed has some connection to the Federal Government.
+It is inevitable that it will go on.
+ Chairman Paul. Thank you.
+ This is a question for Dr. Bivens. This has to do with a
+reference to what Dr. Vedder said earlier. He said that part of
+the reason we go into recessions is because labor costs get too
+high. Of course, nobody likes to hear that.
+ But if this is true--and I believe Keynes spoke to this at
+one time, because labor costs get too high, but you can't go
+and, say, cut your labor. You can't cut nominal costs. But he
+argued that real costs could go down by inflation. And you
+raise it and you lower the value of the dollar, so real cost
+goes down. And that helps you get out of the recession.
+ Do you buy into that argument? Or how would you look at
+that, on the need to get labor costs down?
+ Mr. Bivens. I actually don't buy into that argument.
+ The way I read Keynes is, sort of, as follows: that the
+first shot fired against his idea, that the way to fight
+recessions is to try to have the Fed and to have fiscal
+policymakers add more support to the economy, the first shot
+was, no, no, you just need to get the price of labor down. And
+he said basically, one, it is hard to get the price of labor
+down, even if all workers in the economy said, ``Yes, we all
+agree to a 10 percent wage cut today, cut our wages,'' all that
+would do is lead to a 10 percent fall in prices, as well. So
+the real wage actually would not fall much. It is actually very
+hard--
+ Chairman Paul. Wouldn't that be good? Wouldn't that be
+good, to see prices come down?
+ Mr. Bivens. No, because--
+ Chairman Paul. It would help the consumer.
+ Mr. Bivens. I am sorry?
+ Chairman Paul. It would help the consumer, with prices
+going--what is so bad about prices going down?
+ Mr. Bivens. Because their wages went down the exact same
+amount, and so their purchasing power has not changed at all.
+ Chairman Paul. Yes, but--
+ Mr. Bivens. What you would do is you would make the value
+of their debt more onerous. Basically, by increasing the value
+of debt, again, you have a $150,000 fixed mortgage and all of a
+sudden your wage is 10 percent lower, all of a sudden you are
+more constrained by your nominal debt payments. And that will
+make the economy worse.
+ And so, Keynes is pretty clear, wage-cutting is absolutely
+not the way to get out of a recession.
+ Chairman Paul. Okay.
+ I now will yield 5 minutes to Congressman Clay.
+ Mr. Clay. Thank you, Mr. Chairman.
+ And, Dr. Bivens, we were told by Dr. Vedder that private
+markets handled mortgages and other lending for generations
+successfully without Federal intervention. Again, the data
+shows otherwise.
+ According to the Congressional Research Service, during the
+years 1920 through 1945, the last period of time when the
+Federal Government had a very small role in homeownership,
+rates were only between 40 and 50 percent of homeownership
+nationally. Now that rate, at a time when the Federal
+Government is supposedly inappropriately involved, is 67
+percent. The homeownership rate was even higher within the last
+few years, as high as 69 percent.
+ So I don't see how the numbers back up these claims about
+supposed excessive, expansionary policies on home lending. Can
+you help explain this error?
+ Mr. Bivens. I think my assessment, sort of, agrees with
+yours, that I think the government support of homeownership
+played a key role in having that increase a lot in the post-war
+era. I am willing to quibble a bit that maybe some of the
+homeownership rates we saw in 2006, 2007 were bubble-inflated.
+But the trend is clear as day: With the introduction of Fannie
+and Freddie, with government support for homeownership, those
+rates rose pretty quickly.
+ Mr. Clay. Thank you for that response.
+ Do you think there is value in having the Fed maintain a
+dual mandate for monetary policy?
+ Mr. Bivens. I do, and especially if the alternative is to
+drop the full employment mandate. I think that would be a
+disaster.
+ To my mind, if there is a criticism of the Fed over a
+longer run, the last 30 years, it is that they have actually
+allowed that part of their dual mandate, the full employment
+part of it, to sort of go by the wayside and focused
+excessively on the price stability part.
+ And so, a Fed that actually took that dual mandate
+seriously, I think, would be a very good thing.
+ Mr. Clay. Do you think that if the Fed were operating with
+a single price stability mandate, that its execution of
+monetary policy since the onset of the financial crisis of
+September of 2008 would have been materially different or would
+have led to significantly different outcomes in the economy?
+ Mr. Bivens. It is a good question. I think where that
+single mandate of price stability would really be a bad thing
+is during expansions.
+ The irony here is that most people think the Fed have
+something like a 1 to 2 percent inflation target, seems to be--
+they are pretty consistently missing that, on the low side,
+these days. Inflation rates are coming in well below 1 percent.
+ So even if they only had a commitment to 1\1/2\ percent
+inflation--forget the employment side--if that was their only
+commitment, they should still loosen. And so that is how bad
+the economy is today. Even if all they had was a pretty
+conservative price target, they should still be providing all
+the support they are and maybe even a little more.
+ Mr. Clay. Thank you for that response.
+ And, Mr. Chairman, I yield back the balance of my time.
+ Chairman Paul. Thank you.
+ I now yield 5 minutes to Mr. Huizenga from Michigan.
+ Mr. Huizenga. Thank you, Mr. Chairman. I appreciate that.
+ And my colleague from Missouri just, actually, started
+going down a road that I wanted to explore a little bit.
+ Dr. Vedder, from the historical perspective, I think it
+would be helpful to have a very brief explanation about the
+dual mandate. How long has it been in place? Why was it really
+implemented?
+ And then, moving on to all three of you, is the dual
+mandate a proper mandate? I think Dr. Bivens was starting to
+talk a little bit about that, but I would like to hear the
+remainder of the panel's views on that.
+ Mr. Vedder. The dual mandate--when I think of the history
+of this, I think first of the Employment Act of 1946, where the
+government committed itself to a policy of encouraging full
+employment. And even in that bill, price stability was
+mentioned, and it was part of the so-called mandate. Again, it
+was more a statement of intent rather than a prescriptive
+statement.
+ The Humphrey-Hawkins bill, which I think was, what, 1977 or
+something like that, was a more explicit widening of that
+mandate and made much more explicit.
+ And all of this precedes, sort of--there was almost
+implicit in some of this, a lot of this, as relates to what we
+might call the ``Phillips curve'' idea, that if you have price
+stability--can you have price stability and full employment?
+That is the empirical issue.
+ We can have that discussion. I do not think that the
+manipulation of prices in the long run impacts on employment,
+period. I think it does in the short run. I have written a book
+which indicates it does. There is a Phillips curve in the short
+run sometimes, but in the long run--higher inflation, lower
+unemployment. But in the long run, I don't see that that
+relationship exists.
+ Mr. DiLorenzo. In terms of the price stability, we have
+price indexes that go all the way back to the 1790s or even a
+few years before that. And the price level in 1913, when the
+Fed was created, was roughly the same as it was in 1790, with
+some ups and downs. But ever since the Fed was created, the
+price level is 22 times higher now. So when I hear the idea
+that the Fed has a mandate to stabilize prices, it is almost
+farcical.
+ And I don't think, overall, it has done a very good job in
+stabilizing employment either. You can mandate that is the
+Fed's job, but I think, historically, it hasn't done a very
+good job in either one.
+ Mr. Bivens. Yes, in regards to that, I will say that I
+would much rather have average economic growth and the
+frequency of duration of recessions we have had post-1914 than
+in the 150 years prior. Basically, some moderate rate of
+inflation is the price you pay for having economic growth and
+fighting recessions in a serious way.
+ Again, to the degree that there has been a problem with the
+dual mandate over the past 25, 30 years, it has been that one-
+half of it, the full employment commitment, has really been
+sort of the neglected part.
+ Mr. Huizenga. So if I am hearing you, Dr. Bivens, you want
+to see the dual mandate remain, correct?
+ Mr. Bivens. Yes.
+ Mr. Huizenga. Okay.
+ And I guess, the other two panelists, do you believe it is
+appropriate for that language to remain in there as goals and
+objectives? Dr. Vedder and Dr. DiLorenzo?
+ Mr. Vedder. I think we ought to repeal the Humphrey-Hawkins
+Act, period, just do away with it.
+ Mr. DiLorenzo. I agree with that. We have mentioned
+Christina Romer several times. One of her academic articles
+revises some data and shows that the business cycle was
+actually not more unstable in the pre-Fed era in the 19th
+Century than it was after the pre-Fed era. So you can't even
+make the case anymore, according to Christina Romer's research,
+that the Fed has done anything to stabilize the business cycle
+compared to the bad system we had, the admittedly bad, flawed
+system we had before the Fed came into being.
+ Mr. Huizenga. Dr. Bivens, do you care to address Humphrey-
+Hawkins at all or any of the other points?
+ Mr. Bivens. First, it was my understanding that Humphrey-
+Hawkins was actually no longer in effect. Am I wrong on that?
+Did it lapse in 2005 or 2006?
+ Mr. Huizenga. I wasn't here.
+ Mr. Bivens. Okay. Sorry. So I am not, you know--I think the
+dual mandate should absolutely be part of what the Fed is
+tasked to do.
+ Mr. Huizenga. Okay.
+ Thank you, Mr. Chairman. I yield back my time.
+ Chairman Paul. Thank you.
+ I now yield 5 minutes to Congresswoman Maloney from New
+York, who has joined us.
+ Mrs. Maloney. Thank you so much, Mr. Chairman, for this
+hearing.
+ And I thank all the panelists for their thoughtful
+testimony that they delivered to our offices.
+ I would like to ask Dr. Vedder to comment on some of the
+facts that were raised in Dr. Bivens's testimony. In his
+testimony, he cited a study estimating that the $600 billion in
+Treasury asset purchases is likely to boost GDP by up to a full
+percentage point, which translates into roughly 1 million full-
+time jobs.
+ That same study also stated that the full effect of all
+large-scale asset purchases undertaken by the Federal Reserve
+probably supported nearly 3 million jobs and will have lowered
+measured unemployment by 1.5 percentage points through the end
+of 2012. Other economists and researchers have supported this
+with similar studies and results.
+ And so my question to Dr. Vedder is, isn't this solid
+research, solid evidence that sound monetary policy does help
+create jobs?
+ Mr. Vedder. I haven't read the studies, to be honest,
+Congresswoman.
+ But I will say this: Since the recession began in late
+2007, the Fed has followed the most expansionary monetary
+policy in, I think, its history in a situation like this. It
+has created a trillion dollars in excess reserves. It has done
+a whole variety of efforts and exertions to bail out companies
+and so forth in distress. And yet, we have fewer people working
+today than we did when this effort began. We have the worst
+employment record of any major downturn since the Great
+Depression.
+ And so I can't see any positive association between Federal
+Reserve monetary policy and job creation based on the reading
+of the evidence in a period when we have a 9 percent
+unemployment rate and we have, what, 15 million--``X'' number
+of people out of work. It is kind of hard to get warm and fuzzy
+about the Fed's success rate with its monetary policy in recent
+times.
+ Mrs. Maloney. May I ask unanimous consent to place this
+study in the record?
+ Chairman Paul. Without objection, it is so ordered.
+ Mrs. Maloney. And also to state that Christina Romer and
+others, other economists, including major economists, have
+testified that the economic shocks that our country has
+suffered are 3 times worse than the Great Depression. As the
+daughter of parents who suffered through the Great Depression,
+no matter how horrible this recession is or has been, it is
+nothing like what our country went through in the Great
+Depression.
+ So I would like to ask Dr. Bivens, Dr. Vedder mentioned
+that he believes that there should be constitutional
+constraints placed on the Federal Reserve's authority. Can you
+comment on that? And do you agree?
+ Mr. Bivens. First, I would just like to reiterate your
+point. It is bad out there in the U.S. economy; the great
+recession is really bad. The shock to the private sector that
+happened with the burst in the housing bubble is absolutely
+enormous. Like you say, researchers in many places say it was
+bigger than what led to, actually, the Great Depression. And I
+think it was the aggressive response of policymakers across-
+the-board that kept it from being so.
+ In terms of constitutional limits on the Fed, I would like
+a lot more detail. If those limits would impede them from
+fighting future recessions as aggressively as they fought this
+one, I think that would be a very bad thing.
+ I think it is one thing to say this has been the most
+aggressive response ever and we still have 9 percent
+unemployment. It is kind of like, imagine a town that is
+building a levee wall in response to a flood. You can say, ``It
+is the biggest levee we ever built, but the water keeps coming
+over it. We should stop. It is bigger than we have ever
+built.'' You have to build a wall as big as the shock.
+ Mrs. Maloney. Okay. Thank you.
+ Last week, Chairman Bernanke gave a speech at the National
+Press Club. I ask unanimous consent to place that speech in the
+record.
+ Chairman Paul. Without objection, it is so ordered.
+ Mrs. Maloney. And he stated that, although economic growth
+will probably increase this year, unemployment is expected to
+remain above and inflation below the levels that policymakers
+have judged to foster maximum employment and price stability.
+ Since the Fed's rate has been near zero since December
+2008, the Fed has been using alternative tools to provide
+additional monetary accommodation. Specifically, the Fed has
+been purchasing longer-term securities on the open market, or
+in common speech it has been called quantitative easing. And
+the goal of this has been to put downward pressure directly on
+longer-term interest rates.
+ Chairman Bernanke--and I want to ask the panelists if they
+could respond to whether or not they agree with his statement.
+He stated that, ``A wide range of market indicators supports
+the view that the Federal Reserve's securities purchases have
+been effective at easing financial conditions.''
+ I would like the panel to comment on whether they agree or
+disagree. I think it is an important question.
+ Mr. DiLorenzo. They have to have had an effect in some
+industries, of course, because wherever the money goes to
+first. But, obviously, it has had very little effect on overall
+unemployment, since the unemployment rate remains stuck around
+9 percent or more, depending on how it is measured.
+ So, yes, it has had some effect on some industries. That is
+why the stock market is up, some of the big corporations have
+done well. But unemployment is not being very successful.
+ Mrs. Maloney. Could you also comment on what would have
+happened if we had not engaged in quantitative easing with the
+Fed's fund rate close to zero? What would have happened?
+ Mr. DiLorenzo. Since you are, sort of, looking at me, it is
+not a coincidence, I don't think, that we have had somewhat of
+an explosion in government at all levels--the Fed printing
+money, government spending, government debt, and we are stuck
+at 9 percent unemployment or more. Because all of this diverts
+resources in the direction of government-directed spending in
+resource allocation away from the entrepreneurs and the
+business owners and the consumers, who know a lot better what
+to do with that money than government bureaucrats and
+politicians do.
+ And so I think we would be much worse off--as we said
+earlier before you came, Congresswoman, that we may be sowing
+the seeds of another bubble with all this quantitative easing.
+ Mrs. Maloney. Dr. Bivens, would you comment briefly?
+ Mr. Bivens. Yes, very briefly. If we had not done the
+quantitative easing, long-term interest rates would be higher,
+and we would have less business investment and consumer
+spending.
+ And I would just note, business investment has performed
+very well for the past 5 or 6 quarters, growing at about 15
+percent at an annualized rate. So we would have less of that if
+we had not done the quantitative easing.
+ Mrs. Maloney. My time has expired.
+ Chairman Paul. Thank you.
+ I now yield 5 minutes to Congressman Jones from North
+Carolina.
+ Mr. Jones. Mr. Chairman, thank you again.
+ And I again want to start with an e-mail from my district
+and then get to a question.
+ This is Mr. Gordon Hansen from New Bern, North Carolina:
+``Thank you for requesting my opinion with regard to the
+Federal Reserve. My initial reaction to the Fed's policy to
+printing more money is, how is the Fed going to stop inflation?
+Since the beginning of this century, standard of living has
+decreased because fuel increased so rapidly, the middle-class
+wages could not keep up, and no one seems to notice or care.''
+ This is America talking, quite frankly. And we have been
+elected by the people from all over this country to represent
+their feelings and their needs in Washington, D.C.
+ I have great respect for each and every one of you. You are
+very learned men, much more than I.
+ The frustration that I see back in my district and I feel
+is that, when I was born in 1943--and thank you for recognizing
+my birthday tomorrow--when I was born in 1943, this country was
+in war and coming out of war. This country impressed the world
+with its greatness after the war, of how we were in a position
+where we were creating things, we were manufacturing things.
+ And that gets me to the point that I am one of the few
+Republicans--I am opposed to any trade agreement at this time.
+I am not adamantly opposed to trade agreements, but when you
+are in a deep recession, which everybody has acknowledged, why
+are we passing the Korean trade agreement so we can create
+70,000 jobs, I believe has been said. I am trying to verify
+that, by the way. I don't believe it.
+ But the point is, this country is a debtor nation. Now, we
+can pump it up, from the Feds to everybody else can put money
+out here. But, as everybody is saying, the people understand
+what is happening. They fully understand what is happening.
+ So my point is this. My State of North Carolina, from 1999
+until 2009, lost 376,000 manufacturing jobs. What would have
+happened, in your opinion--I have a two-part question--what
+would have happened, in your opinion, if we had not passed
+NAFTA, CAFTA, and all of these trade agreements that supposedly
+were going to create more jobs for the American people?
+ I think greed is probably the most dangerous thing
+affecting America. Greed will destroy an individual, it will
+destroy a family, it will destroy a country. And my humble
+opinion is that greed has put America in this position, not
+only because of trade agreements.
+ But, in your learned minds, give me an example of nations
+that at one time were economically strong and yet, because of
+some decision such as free trade, that these nations--and maybe
+it is not exactly the same comparison--but these nations, in my
+opinion--at one time, Spain ruled the world. At one time,
+France ruled the world. At one time, Rome ruled the world. At
+one time, America was the dominant power. Now it is China. And
+we are slaves to China. We owe them over $900 billion.
+ From an economic standpoint, where do you see America? Are
+we at a point that America needs to understand that we cannot
+come back to be a strong power in the world? Are we at a point
+where, yes, we will have somewhat of a quality of lifestyle,
+but it is never going to go back, it is not even going to come
+close to going back to what it was?
+ I don't think you can continue to sell yourself out to
+other nations and expect to be strong economically or
+militarily.
+ Any response?
+ Mr. DiLorenzo. Sir, the countries you mentioned, the
+Spanish empire and so forth, they essentially bankrupted
+themselves with empire. And, in my view, we are a long way down
+that road with our military empire all around the world, too.
+And so I think that is a contributing factor.
+ And the only other thing I will say is, I am a free-market
+economist, but I opposed NAFTA at the time because when I first
+saw it, it was, like, a thousand pages of government
+regulations. And I didn't think it really constituted free
+trade at all, but government-managed trade. And I guess you
+would you have to do a careful study of how it has been managed
+over the past 15 years or so to really know its effects. But I
+wouldn't blame the problems on free trade, because I don't
+think NAFTA was a free-trade agreement, despite the words
+``free trade.''
+ Mr. Jones. Thank you.
+ Mr. Vedder. I more or less agree with Professor DiLorenzo.
+I do believe in free trade as a concept. I think most
+economists do. This is one thing economists of all persuasions
+more or less agree with, but we do put a lot of provisions in
+these bills that get far afield from the issue of trade. And I
+think that is a source of concern.
+ As an economic historian, I would have to note that nations
+have rises and falls in the way people work and what they do.
+We had a rise in manufacturing in the 19th and early 20th
+centuries because of what us economists say, we had a
+comparative advantage in manufacturing. We have lost some of
+that comparative advantage today. Some of it has to do with
+government policies. Some of it has to do with other things
+that have nothing do with what the U.S. Government does.
+ I don't personally worry too much about the loss of
+manufacturing jobs per se. What I worry about is the loss of
+jobs in totality, the productivity of labor in its totality,
+and so forth. And that is, I think, a broader concern.
+ Mr. Bivens. You asked a very big question, so let me just
+try to be very brief.
+ I think it is absolutely true that if we want different
+results, if we want living standards to continue to grow at a
+reasonable rate in the United States for the broad workforce,
+we better start doing lots of things differently. And one of
+those things we should do differently is our international
+economic policy.
+ I am a little shocked to agree; I also did not like NAFTA.
+I think we need to think about exchange rates very differently.
+And so we better start doing things differently if we want to
+continue to grow.
+ Mr. Jones. Thank you, Mr. Chairman.
+ Chairman Paul. Thank you.
+ I will yield 5 minutes now to Mr. Green from Texas.
+ Mr. Green. Thank you, Mr. Chairman.
+ Let's talk for just a moment about causal connections as
+opposed to coincidence. Last summer, when the American Recovery
+and Reinvestment Act was at its zenith, when it was providing
+maximum benefit, we also at that time saw the turnaround in
+terms of a recovery in the economy.
+ Mr. Bivens, was that just coincidence or is there a causal
+connection?
+ Mr. Bivens. I definitely believe there is a causal
+connection. Like you say, the Recovery Act was providing a sort
+of maximal boost to the U.S. economy at that point. There are a
+lot of estimates that said, without the support provided by the
+Recovery Act, we would have seen zero growth for about 3 or 4
+quarters even after the official recession ended.
+ Mr. Green. Let's move now to the FDIC.
+ Mr. DiLorenzo, do you, sir, believe that the FDIC serves a
+meaningful purpose with its ability to wind down banks that are
+failing?
+ Mr. DiLorenzo. With its ability to close down banks?
+ Mr. Green. That are failing. When they are failing, the
+FDIC moves in, usually on a Friday, they wind down the bank,
+and then on Monday there is a new bank that opens, perhaps
+under the same name, or a new name, but they do reopen, and
+they move the assets. And they have the ability to do this with
+a premium that is paid by banks so as not to interrupt the
+economy.
+ Do you agree with this?
+ Mr. DiLorenzo. I don't think we need a government
+institution to do that. That could be handled by the courts, I
+would think. But it is probably one of the least offensive
+things the FDIC--
+ Mr. Green. You would not have the FDIC, you would have the
+courts deal with the banks and the runs that would be created
+on banks? You would have multiple banks, as was the case when
+we were starting the great recession, that were challenged, and
+you would just simply let all of these banks go into
+bankruptcy? Do you not see that by doing this we would have
+runs, greater runs on banks that would create greater stress on
+the economy?
+ Mr. DiLorenzo. I am not sure--before we had an FDIC, I am
+not sure you could make the case that the bank runs were worse
+throughout history.
+ Mr. Green. They were. Before we had the FDIC, we had the
+Great Depression.
+ Mr. DiLorenzo. Yes, for a few short periods. But if you
+look at the long stretch of history, I don't think--you would
+have a much tougher time making that case.
+ Mr. Green. I would say to you that a few short periods that
+devastate the economy to the extent that the Great Depression
+did is something that would not go unnoticed.
+ Mr. Bivens, do you think the FDIC serves a meaningful
+purpose?
+ Mr. Bivens. Absolutely, for the reasons you say. They make
+people secure in their deposits, and so you don't see the runs.
+ Mr. Green. Mr. Vedder, do you think the FDIC serves a
+meaningful purpose?
+ Mr. Vedder. I wrote my doctoral dissertation on the FDIC. I
+think, generally, it has been one of the more successful
+government agencies. I do think it needs, however--
+ Mr. Green. Excuse me, since my time is limited. Thank you.
+Let me just follow up with this.
+ Mr. Vedder. It needs--
+ Mr. Green. You will get an opportunity.
+ Let me follow up with this. Given that you think it serves
+a meaningful purpose--and I agree with you--let us then
+conclude something else. Do you think that we should be able to
+wind down these AIGs of the world when they can provide
+systemic risk to the economy? Or should they just be allowed to
+bring the economy down?
+ The AIGs of the world--you are familiar with AIG?
+ Mr. Vedder. What do you mean by ``wind them down?'' Why
+don't we let them go into bankruptcy? What is wrong with
+bankruptcy?
+ Mr. Green. Why not let the banks go into bankruptcy? That
+is the point. You just said that the FDIC protects banks. If
+you are going to prevent banks from going into bankruptcy, why
+not try to salvage the economy and prevent the types of stress
+that can be caused by having these institutions that create
+systemic risk, by preventing them from just simply going into
+bankruptcy and creating all of these problems for us?
+ The point I am making is, Dodd-Frank deals with that. If
+you don't like Dodd-Frank, then you don't like a means by which
+we deal with ``too-big-to-fail'' institutions. Most people
+think that we need to do something about these institutions
+that were labeled ``too-big-to-fail.'' Dodd-Frank addresses
+this. Dodd-Frank addresses other aspects.
+ You mentioned credit cards. Do you think there ought to be
+something called universal default? A lot of consumers are
+sitting in here. Are you familiar with that term, ``universal
+default?''
+ Mr. Vedder. I am familiar with the term, yes.
+ Mr. Green. Are you familiar with it? Do you think we ought
+to have universal default?
+ Mr. Vedder. I haven't--I don't have a position on that.
+ Mr. Green. I do. I don't think consumers ought to be in a
+position such that, because they have problems in one place,
+credit card companies can simply decide, we are going to
+declare you in default with us because you had a problem
+someplace else, especially in this economy. Dodd-Frank deals
+with this.
+ Mr. Vedder. Does it deal with Fannie Mae or Freddie Mac?
+ Mr. Green. Now, let me ask you one more. I have one more
+for you. I believe you are a gold standard person. Is that a
+fair statement, based upon your comments and your writings?
+ Mr. Vedder. I think the gold standard--we did well when we
+were on the gold standard.
+ Mr. Green. And if we return to it, if we return to the gold
+standard, what would happen?
+ Mr. Vedder. Pardon?
+ Mr. Green. What would happen if we returned to the gold
+standard?
+ Mr. Vedder. It would be very--the return to the gold
+standard is not--if we did it and if the world did it, I think
+we would be a better place. I think we would be a better place.
+But I don't see it happening in the short term.
+ Mr. Green. Let's assume that you have made a prediction
+that we would be in a better place. Is that a fair statement?
+ Mr. Vedder. Yes.
+ Mr. Green. Now, what did you say about people who make
+predictions earlier?
+ Mr. Vedder. Economists are lousy predictors.
+ Mr. Green. What did you say about the people who make
+predictions?
+ Mr. Vedder. So why are you sitting here listening to me,
+Congressman?
+ Mr. Green. I am listening to you because you are here as a
+person who merits some attention, given that you are before
+Congress.
+ Now, tell me, what did you say about people who make
+predictions?
+ Mr. Vedder. What did I say?
+ Mr. Green. Yes, sir. You don't recall?
+ Mr. Vedder. I said that some people, some economists make
+bad predictions, and some of them make good predictions.
+ Mr. Green. You had an ``F'' word that you used.
+ Mr. Vedder. I did?
+ Mr. Green. Yes.
+ Mr. Vedder. I don't remember.
+ Mr. Green. I do. You said they were foolish.
+ Mr. Vedder. Foolish?
+ Mr. Green. Yes, sir.
+ Mr. Vedder. Oh, okay.
+ Mr. Green. All right. Thank you for your prediction.
+ Mr. Vedder. Okay.
+ Mr. Green. I yield back.
+ Chairman Paul. I yield myself 5 minutes for closing remarks
+and anybody else who wants to have another question.
+ I do want to bring up the subject generally of QE2. There
+is a strong disagreement between those who object to it and Dr.
+Bivens, who thought that it really has helped a whole lot. And
+I don't think we will resolve that.
+ But, that was part of the program of injecting $4 trillion
+into the economy, with the argument that it has done very, very
+little at all and, some of us believe, maybe harm in the long
+run. But the $4 trillion, actually we can argue that it did
+help prevent a depression for some people, mainly Wall Street
+and the big bankers and some corporations. They were able to
+benefit. And who came out on the short end? The people who lost
+their jobs and lost their houses and lost their mortgages. So
+the whole thing didn't work if you were trying to help the poor
+people. I think you were destroying the poor people while it
+was nothing more than corporate welfare--$4 trillion, and we
+have very little to show for it.
+ But the question I want to address is, there is a little
+bit of talk--I don't think it is serious--about unwinding this.
+We bought up all the trash, all the worthless assets. And the
+taxpayers own this now, and it is on the books. We can't fully
+audit the Fed. We can't find out what they are doing. And now
+they are talking about, maybe we ought to unwind this. That is,
+we are going to sell that trash. Who is going to buy it? How do
+we do it? And when do we do it?
+ Chairman Bernanke says it is not time yet, but he is really
+cocky about this. He knows when it is, and he is going to do
+it, and he is going to do it smoothly. And what did he say
+about problems coming? His anticipation, his whole idea that
+when a crisis comes and when there is a recession, I can take
+care of it, I know how to inject money in just unlimited
+amounts. And I tell you what, he did, unlimited amounts, the
+largest ever. And the jury may be still out on how bad a
+failure it is going to be, but the time will come.
+ But the question is, what are we going to do about
+unwinding? Are they really serious? And what would that do to
+employment? If they did it now--they are not going to dare do
+it now, with unemployment rates, real unemployment rates up to
+22 percent, because it would do that horrible thing of raising
+interest rates. So that is not going to happen.
+ What they are going to do is continue to look at the CPI.
+That is where Bernanke is going to get his signal. When the CPI
+goes up and we have price inflation, that is when we have to
+unwind.
+ And he is so overconfident about this. You talk about
+predictions and braggadocio, ``I can take care of it.'' Like,
+he didn't know it was coming, he would take care of it if it
+came, and now he says, ``I know exactly when to turn it off.''
+I just think that is such dangerous talk.
+ By looking at the CPI, what does he do? He takes the CPI,
+he excludes food and energy, and says, gee, CPI isn't going up,
+and he has price stability. There is no more price stability in
+this country when you look at what happens to the bond prices
+and the housing prices and commodity prices. There is nothing.
+What is this stuff about unwinding?
+ I would like a comment from each one of you on what is
+going to happen, or if it happens, and what are the abilities
+of truly unwinding this and really saving us from a calamity?
+ First, Dr. DiLorenzo.
+ Mr. DiLorenzo. Congressman, what you just said reminds me
+of what Friedrich Hayek won the Nobel Prize for in 1974. It is
+summarized in a book of his called, ``The Fatal Conceit.'' And
+it is essentially a critique of this whole idea that one man or
+one group or one committee could, sort of, essentially plan an
+economy, whether it is by manipulating interest rates or the
+price level or whatever else. And I see no reason why we
+Americans are better at central planning today than the
+Russians were in the 20th Century.
+ That is basically the mindset that you are talking about
+when you are talking about Chairman Bernanke claiming to be
+able to manipulate the economy in these ways. I don't see any
+way out. If he had a smooth exit strategy, I assume he would be
+taking it right now. And so I see nothing but bad things that
+could possibly happen from winding down, as you say.
+ Chairman Paul. Dr. Vedder?
+ Mr. Vedder. To me, the supreme irony of all of what you
+just said and what Professor DiLorenzo said is, why was the Fed
+created in the first place? I think if you read the history of
+the period, after the panic of 1907--the panic of 1907, there
+was no central bank. And so, what happened were a bunch of
+private bankers, led by J.P. Morgan, sort of organized an ad
+hoc committee to sort of save banks and prevent them from
+failing. And by the way, it achieved some success in doing
+that.
+ But afterwards, people said we can't have a single
+individual serve as sort of the guru to save our economy, like
+J.P. Morgan. We have to create a central bank and decentralize
+it into 12 banks and all, to keep the power diffuse.
+ And we moved away from that diffusion of power back to the
+centralization of power. Now it is Bernanke. At least J.P.
+Morgan had some skin in the game. He had some money in the
+game. When the banks failed, he failed. What does Bernanke have
+in the game? He gets his salary anyway and then goes off to
+work for Goldman Sachs.
+ So I think that is it. And I have no idea how it is going
+to be unwound. Because it is an historically unprecedented
+situation, I can't predict. But I am uneasy. And that is why
+markets are uneasy. And that is why prices--that is why we have
+the problems we have. That is why bond prices are starting to
+go up. That is why Moody's is starting to say, should we give
+AAA bond rating to the U.S. Government securities? Things like
+that. People are getting uneasy.
+ Chairman Paul. Maybe Dr. Bivens will be more optimistic.
+ Mr. Bivens. Slightly, yes. It is not a trivial challenge
+about how this is all going to be unwound. But I will say just
+two things quickly.
+ One, it is going to actually feel like a luxurious decision
+if we can start unwinding this and the unemployment rate is
+much lower. And so, to my mind, the proper focus now is on
+providing maximal support to job growth in the economy, not
+worrying so much about how this is unwound.
+ And two, I have to say, I am sure there will be mistakes
+made as we do it. I am sure there will be some targets missed.
+But he has actually--Ben Bernanke and the rest of the Fed has
+laid out a strategy for how this will be unwound. They have
+talked about the instruments they are going to use, the levers.
+Is it going to work perfectly? Are they going to hit forecasts
+to the decimal point? Absolutely not. But, to my mind, the fact
+that they are focused much more on support and job growth in
+the near term says very good things about what they are doing.
+ Chairman Paul. Thank you.
+ Mr. Clay, I yield to you for another 5 minutes. Or Mr.
+Green.
+ Mr. Clay. Mr. Chairman, I will yield to Mr. Green.
+ Mr. Green. Thank you, Mr. Chairman. And I thank the ranking
+member, as well.
+ I would close by reminding us that we have seen, I am sure
+many of you, the movie, ``Back to the Future.'' Based upon what
+I have heard today, there are some who would take us ``forward
+to the past''--back to the past, or forward to the past, when
+we didn't have a Fed, when we didn't have FDIC, when we did not
+have VA, when we did not have many of the institutions that
+have helped people move into the middle class. Home ownership,
+30-year mortgages--these things have made a difference in the
+lives of the American people.
+ And I would caution us, before we make decisions to
+eliminate institutions that have served us well, perhaps we
+should consider the unintended consequences of such a massive
+decision. And I think we ought to proceed with a great degree
+of caution when we say things like, we can live without the
+Fed, without the FDIC. I am indicating VA; no one said it. But
+when you are on this track, it appears to me that you may be
+talking about the VA, as well.
+ Many of these institutions have served a good many middle-
+class people well, and we ought to move with caution.
+ I thank you for the time, and I yield back.
+ Chairman Paul. The hearing is adjourned.
+ [Whereupon, at 12:15 p.m., the hearing was adjourned.]
+ A P P E N D I X
+
+
+
+ February 9, 2011
+
+[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
+
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+