academics and on the staff. i was a young full employment liberal, one of our colleagues, james pierce, former federal reserve research director was a mainstream keynesian at the time. two other colleagues, robert hour back and robert wine trap were chicago monetaryists trained by william friedman. we compromised and gave tra transparency to the federal reserve in the presence of ultimate objectivity but did not impose anyone's theoretical views. had we done so, i fear the oversight process would have failed long ago, perhaps when mainstream academics adopted the concept of a natural rate of unemployment in the early 1980s, perhaps when the classical mon tarri tarrism, the relationship between money and prices fell apart shortly after that.

instead, being flexible, it has survived 35 years even though theories have come and gone and and objective of monetary policy. it is the presence of the maximum employment objective, alongside price stability, in my view, gives the federal reserve leeway to pursue inflation targeting at some rate other than zero, forever it chooses to do that. similarly, if in some alternate universe the federal reserve were to pursue a full employment strategy at all cost the presence of the price stability language would give you legitimate cause to question its policies and the reasoning behind it. having price stability alone in the charter would put the federal reserve in the position presently occupied by the

european central bank, a very difficult position obliged to pretend to ignore unemployment even as that issue becomes increasingly important in the politics of the region it's responsible for, obliged to pretend to respect its charter when circumstances dictate in fact it deviate from it and it would put the federal reserve in a perpetually difficult, i think, false position before congress really make it very difficult for the federal reserve to report forthrightly on what it's doing and i think it would equally put the congress in an extremely difficult position as unlike the european central bank, which is an independent entity, the federal reserve is not and cannot be independent of congress, it is a creature of congress under the constitution. i think also that creating a single ridge get price stability mandate would bring back the technical difficulties we

experienced in the 1970s and 1980s over the definition of money, definition of price stability would become similarly problematic if one looked at the notional definitions of inflation presently in use, i think you would find the federal reserve did not in fact violate its price stability mandate in the run-up to the great crisis. it would be very hard to know before the fact when it was doing something that was not consonant with that mandate. finally, this is a time afirment in academics as the 1970s were. the profession fell into complacency before the great crisis and the crisis delivered a shock from which academics has not recorvered. issues of the cost of resources, as yet, i think, unfinished project of financial reform remain unresolved. unemployment is not going away, as many prominent forecasters

believed it would have by now. and there are limits to what the federal reserve reserve can achieve. reasonable price stability, the language in the humphrey hawkins preamble, as i recall, is an important objective, but so is full or maximum employment. i think congress would be well-advised not to commit to either one at the sacrifice of the other. i do urge congress to continue to pursue the goals of oversight, accountability and probe deeply what the federal reserve is doing but within the framework of present law. thank you very much. >> i thank you now. recognize dr. rivlin. >> thank you, mr. chairman. i'm happy to have this opportunity to testify before this subcommittee, as you consider the diverse set of bills about the federal reserve. i will concentrate my remarks on the dual mandate. i believe that the dual mandate has served the united states well, and that it would be a mistake to restrict the fed's policy actions to fostering stable prices alone.

i'd like to make clear at the outset, mr. chairman, i believe in a strong independent central bank. without a strong independent central bank, functioning to mitigate academic and financial instability, i believe the united states would have a weaker, far more chaotic economy and lose its leadership position in the global economy. the objective of academic policy, including monetary policy should be a rising standard of living for most people over the long run. controlling inflation is a crucial element of the larger objective, because high and especially rising inflation is a serious threat to sustained growth. i believe the dual mandate is simply a reflection of what average citizens ought to expect their central bank to do. l let the economy create as many jobs as possible but don't let

inflation interfere with that job growth. dm economists translate that common sense exhortation into monetary policy keeping the economy as close as possible to its long-run potential growth without seriously overshooting in either direction. this concept enshrined in professor taylor's famous rule. the problem for the federal reserve decision-makers is that potential growth is not observab observable because it depends on trends and productivity growth which can shift unexpectedly. in the stagflation of 1970s, hindsight indicates monetary policymakers overestimated potential growth and did not tighten soon enough to avoid the acceleration of inflation at the end of the decade. in the '90s when i was at the fed, we faced a happier version of the same uncertainty. we had unemployment very low but no inflation. we held off tightening in the

presumption, which proved correct that accelerating productivity growth had raised potential growth and reduced the risk of inflation. partly thanks to the fed, we had a very good decade in the '90s. we also balanced the budget. the sooner we get back to those conditions the better. but the late '90s also illustrated the inadequacy of the fed's tool kit in response to asset price bulbs. the dot kcome bubble if the fed had raised interest rates to deal with the dotcom bubble it would have pushed the economy into recession and punishing companies for no good reason. influencing the federal fund rate through market operations is simply not an effective way of calming an asset priced bubble. we learned that lesson again in

the early 2000s. while we should not have needed a catastrophe to learn this lesson, the dodd-frank bill or act, now gives the fed and the financial stability oversight council responsibility for financial stability and new tools with which to help achieve it. the dual mandate is non-inconsistent with strong emphasis on controlling inflation when appropriate and even with an ex-splifrt target for inflation. indeed last january, the fed confirmed a long run inflation goal of 2%. operating under the dual mandate, the fed has successfully controlled inflation for three decades. to change the language of the law to imply the fed's only concern should be inflation would send a misleading signal to a public rightly concerned with jobs and growth as well as inflation. it would imply that inflation is

a serious current threat to american prosperity which seems to me unwarranted. what we need now is a continuation of accomodative monetary policy, plus fiscal policy that combines additional investment in long run growth and jobs with credible long-run action to stabilize the debt. in short, monetary policy, as executed by the fed under the dual mandate has a positivestive track recognize and is currently appropriate. i would urge the congress not to tamper with legislative language that has served united states well. thank you. >> i thank the panel. and i now yield myself now five minutes for questioning. firstoff, i'd like to address my question to dr. herbener and dr. klein. today, even with our previous panel and this panel, we've heard a lot about the dual mandate. it seems like that's what we've

spent most of our time on today. if you could, put that in prif. how crucial is that? how much difference would it make? i know you have a different opinion about the overall picture in the monetary system. if we are -- we're not on the verge of having a commodity standard and restraint on the authorities. but how crucial do you think this debate is and how much difference does it make whether it's a single or dual mandate? dr. herbener? >> i don't see too much evidence -- >> make sure i can hear you. >> i don't see too much evidence that in the performance of the fed, the concentration on one wing of the mandate or another has changed their actual performance. so the fed was in the 1980s concentrating on price stability more than the unemployment mandate, and yet they inflated

te to the extent of creating the stock market bubble of '87 that burst and gave us the recession of '90 and 91 and other areas they concentrated on unemployment, their performance likewise has not been spectacular, somewhat similar, i think. i don't think in practice, the dual mandate has been effective in restraining the fed's monetary policy or improving it one way or the other. >> dr. klein, do you have anything to add on that? >> i agree with that. i would add, if you look at the incentives of the central bank, the central bank always has a stronger incentive to increase, be accomodative and increase credit rather than be contraction airy. i would be more concerned about an emphasis of full employment which encourages the fed to go in the direction it wants to go anyway and i'd be less concerned

about it relatively speaking on emphasis on price stability and restrain the fed and go against the direction it wants to go. >> the argument it didn't restrain them is precisely the reason they like the mandate because it allows them to expand the money at will. of course, we see this as a problem. quick question for dr. taylor, who you're emphasizing some of these monetary rules. even more monetary statistics. would you be in favor of the d fed, once again, issuing a report on the size and growth of m 3? >> i would be in favor of the fed doing that. i think it's the more emphasis on money statistics, the better, in my view. they didn't pay enough attention to that. i would say from the point of view of the congress, it seems to me you want the congress, the fed to report on its strategy, not to dictate exactly what the

strategy should be. that's the fed's job. you come to this hearing and report the strategy explicitly, like they did about the ms, i think was constructive and also requires the congress, this committee, to ask the questions about the strategy. i think that dialogue is very important. i wish we'd go back to that. >> dr. galbraith, i tend to agree with you about the constitutionality of appointments to the federal reserve board. we always have a different opinion about what we should be doing with monetary policy and the federal reserve. where does this authority come, constitutional authority, since you addressed the constitution, the constitutional authority to actually emit the bills of credit, which is prohibited by the constitution, the creation of a fiat monetary system? where does that authority come from exactly? >> i believe, mr. chairman, and

i would be cautious about tangling with you on this, that the authority for the federal reserve act simply comes from the authority given to congress to coin money, regulate the value thereof, and that the federal reserve act, of course, has been functional piece of american law for over a century now. it would be a surprise to me if it were, per se, unconstitutional on that grounds. >> of course, if there's a pro-hibitions to the constitution, you can't change the constitution by the federal reserve act. dr. rivlin, i think the removal of the report on m-3 came aftafter, i think you left the fed, i'm not sure. why was that dropped? what would it have harmed us to know a little bit about the broad money supply? it seems like it emphasizes a point of money growth and many believe still that the true price inflation is a consequence

of money growth. was there any reason that we shouldn't have that figure presented to us? why was it canceled out? >> i don't know. that was, i believe, after i left. i'm always in favor of more information rather than less. but the emphasis on the monetary aggregates was decline iing for good reason. m they weren't stable with respect to anything. we've had all sorts of different kinds of money created in the last few decades. the idea that it was mostly checking accounts and savings accou accounts has just disappeared. >> i, of course, would like to see more attention given to the stableness or definition or

explanation of defining what the monetary unit is rather than trying to concentrate on the consequences of an unstable currency. we don't have much time to get into that. now i will yield five minutes to mr. clay. >> thank you, mr. chairman. welcome back, dr. rivlin. dr. rivlin, at any time during your tenure on the board of governors, did the dual mandate interfere with the board's ability to set monetary policy? >> no, i don't believe it did, mr. clay. setting monetary policy is really difficult. you're always weighing different consideratio considerations. but we were very focused when i was there, on what was happening to productivity growth, which

was something of a mystery. we weren't very worried about inflation because it was falling. so we continued, i think, thinking we were in conjunction with both mandates, to keep interest rates relatively low. >> inflation was falling because the economy was robust, was growing jobs, and that was because the administration was working with congress to help the economy along, is that correct? >> well, we had strong growth in the economy. we had a restrictive fiscal policy in that period. we were trying to get back to a balanced budget, which sounds like a fantasy now, but -- and we did it, so the fed's job was easier at that moment because the fiscal policy was quite

restrictive. >> thank you for that response. credit galbraith, as the architect of the dual mandate, can you share with this committee the vision and the need that the two legislative auth authors had for the dual mandate then, back then, senator humphrey and congressman hawkins? >> yes, congressman- >> please turn on your microphone. >> i had the privilege of working directly with congressman hawkins. >> yes. >> at that time. of course, an academic policy mandate was not a new thing for the united states. we had the employment act of 1945, which stipulated maximum employment production and purchasing power as the goals of united states academic policy for the whole of the government. the humphrey-hawkins full

employment and balanced growth act sought to modernize and to make a little more ambitious and a little clearer the objective, particularly with respect to employment. it also ended up clarifying what was meant by purchasing power, where reasonable price stability came into the preamble. it was a way of, broadly, specifying academic policy objectives for the entire government, but also with respect to the federal reserve, this was the moment we had set up through h conrad 133 in 1975, a process of dialogue with the federal reserve regular oversight hearings, which goes on and the humphrey-hawkins act federal reserve provisions placed those into law and set a regular procedure. that included, of course, professor taylor has said, goals for the growth of various monetary aggregates, which over time, as dr. rivlin has just

said, became less useful because the relationship between those objectives or those statistics and anything you ultimately cared ultimately cared about became much noisier and less reliable. >> thank you for that response. doctor, being from missouri, my home state, let me ask you about something that american, concerned about, and that's the rise in gasoline prices at the pump, especially the working class. what measures could the federal reserve take to stabilize the recent rise in gas prices? any suggestions? >> well, the price of gasoline and the price of, the price of oil follow a little bit outside the mandate of the monetary authority. so certainly rising energy

prices is one manifestation of a monetary policy that is overly accommodative, but on the whole energy prices especially for oil, for gas and so forth, are set primarily in global energy markets over which u.s. policymakers have relatively little control. there are measures about increasing supply and so on that might be within the purview of congress or the executive branch. in my view, there's not much the federal reserve system can or should be doing about that. >> okay. thanks for your response. i yield back. >> okay. i now recognize gentle lady from new york, dr. hayward. >> thank you, mr. chairman and thank you again for holding this hearing and for your leadership on this crucial question. i'd like to ask this question of the panel. is it fair to say that we probably would not have to

debate as -- as vigorously and as urgently as we do and legitimately so under are these circumstances, the role of the fed were it not for the fact that the fed has, as our central bank had to contend over the decades with an increasingly incontinent federal fisc? to me, it strikes me as, when we talk about the mandates for the fed and the way in which it appropriates -- again, thinking about our conversations with chairman bernanke -- that so much of what the fed has felt compelled to do, if you will, and i realize i'm using some loose interpretation there, has been in response to the fact that we have a federal government that fundamentally has continued at an accelerated rate over the past few years to

mismanage, if you will, large segments of the economy? dr. klein, perhaps you could start with that, please? >> certainly it's the case the job given to the fed becomes more difficult under the circumstances that you describe, but i'm not sure it's right to think of other branches of the federal government, the treasury, congress and so on, and the fed as being sort of antagonists, competing against each other or playing off each other. i mean, one of the major functions performed by, you know, in open market operations is as has already been discussed earlier this morning, monetizing the debt. so the fed facilitates government expenditures and government borrowing, but otherwise would not be politically feasible if the fed were not there to monetize the debt. i think the fed and the rest of the federal government are much more likely to be seen as working hand in hand than opposing each other.

>> which is actually what i meant exactly. i mean, the fed has been the government's enabler to a certain extent. the federal government's enabler, it's a that's part of our problem. it's difficult to use monetary policy to endlessly accommodate what we've taken on. >> yes, i agree with that. >> thank you, sir. dr. herbener? thank you. >> yes. i agree as well that it create as certain type of moral hazard to be able to appeal directly to a printing press or to some agency that would monetize debts that are issued. i would be profited as well, anyone would, not having that kind of accommodation. >> absolutely. dr. taylor, thank you. >> yes. i think if you hold out your shingle, say you're open for business, then people will come, and i think that's basically what has happenedthe federal reserve has provided what you

describe as an alternative to some actions. it bought 77% last fiscal year of the debt issued by the government. that's a big -- big intervention. >> right. >> i think there's a monetary policy is itself part of the problem here. given what it's done. but fiscal policy obviously is a problem, as is regulatory policy. so there's a whole gambit of policies. each should be addressed separately. monetary policy can be improved and so can fiscal and regulatory policy. but the idea of working hand in hand works to all kinds of problems we've seen already. that's why i think questions about the mandate are important. >> that, indeed, is why i myself have become a co-sponsor of representative pence's bill because of that moral hazard issue. i'm eager to hear from the others? >> i think many of our problems now are due to disastrous

deregulation and desupervision of the financial sector, which led to a catastrophic meltdown of that industry and of the solvency of much of the middle class, and the consequences, the effects that we see in the federal budget are largely a consequence, not a cause, of that phenomenon. tax revenues fall, unemployment insurance payments go up. other kinds of stabilizing payments go up. we are much better off, actually, for having a large federal government, federal budget that can stabilize the economy in this situation than we would be if we didn't have it. we didn't have it in the 1930s and the, our output fell by about one-third. the overall decline was much less this time around, because incomes were substantially stabilized by the fiscal actions of the government. >> wow. we've gotality of food for thought there, doctor. you've defined the crux of the

contrast between the two sides of this. and i realize i've run out of time. thank you chairman very much. i yield back. >> thank you. i now recognized gentleman from arizona mr. schweiger. >> thank you, mr. chairman. forgive me, but this is sort of an esoteric question, and no pointing and laughing, particularly for all of you with ph.d.s. we take a look back over the last 30 years at many of the different asset bubbles, whether it be real estate, or even certain commercial bubbles whether it be the internet bubble. it was often large amounts of resources going in, inflating value and beyond. is it theoretically possible to have a bubble on the fed's balance sheet? by acquiring so much u.s. sovereign paper? so much mortgage backed mbs? at some point does it create a type of distortion in the market? either by creating dramatically

artificially low interest rates over here and at some point that's a bond bubble. it's a cascade effect? or actually on their own holdings itself? and is that just as, you know, right now we have the discussion about, are we heading towards a student loan bubble? because we're a trillion there, heading two 3 trillion on the balance sheet. it's a little esoteric and -- but is it one off? and, doctor, please, share with me. is my concern just sort of unfounded? >> i think the fed -- >> can you pull the mike really close? >> i think the fed balance sheet, of course, exhibits the source of the bubbles that manifest in the economy. so when we see the fed's balance sheet, they engage in open market operations or buy mortgage backed securities from the banks aen eneand genre arate

banking system it creates the possibility the bank's just creating credit on the basis of these reserves, and channeling this credit into particular lines of activity, where the bubbles arise, and so this is the very process by which the asset price bubbles are generated in the economy. we can't always tell exactly what lines they'll be generated in just by looking at the fed's balance sheet because the banks, of course, can -- >> and dr. riv kinn? >> will you not remember, many years ago i ran into you walking down the street, and were you very, very kind to me. you spent literally 10, 15 minutes just talking to me on the street about some, a couple esoteric issues. i've always been very appreciative of your time. >> thank you. glad you have that memory. i think asset bubbles are a real problem for the fed, but not because of the bal s