authority the fed was given to ban imprudent loans to people who couldn't afford them. mr. greenspan flatly refused to do that and later acknowledged that was an error in front of mr. waxman's academy and during 2004 and '05, some of us on this committee tried to re-legislate that. i do think there was a problem from the fed but not for causing a deflation in the economy or mess in general, it was refusing to use the specific tool they were given to stop the bad loans from being made. >> my time has expired. thank you. >> i thank the gentle woman. i now recognize mr. -- for five minutes. do you believe we need an entity that can be the entity that put the finger in the dike when

something starts to happen? >> the answer is yes, in some regards, addresses miss maloney's question. under a single mandate, focused on the purchase power of the dollar, could the fed intervene? in times of mercy? the answer is yes. they would still be the lender of last resort and provide liquidity to those banks and still have liquidity problem but are solvent and ability to increase or decrease interest rates to tighten or loosen money supply. they would still in a single mandate have the ability to intervene in unusual and exigent situations. what they would not be allowed to do, continue to intervene far beyond that financial crisis again contributing to the uncertainty today.

>> it would seem that looking at the last 20, 30 years, their ability to impact our economy is greatly exaggerated on both ends. it would seem to me they can nibble around the edges on these but if they actually had the ability to control unemployment we wouldn't have the situation we have today. if they control inflation we wouldn't have the situation we had over the last several years, as long as you have an economy rolling very stable they can tweak it around the edges and doesn't appear they can do much more than that. i really like your approach here. one of the questions i had with regards to the section or title 4 of your bill with regards to exchange rate responsibility, can you explain a bit about that section and how -- why you put it in here and what you want to try and accomplish with that? >> is this dealing with the special drawing rights, ending that slush fund?

>> exchange policy and renaming the exchange stabilization fund. >> we have, unfortunately, over time, created, in effect a slush fund within the federal reserve both from historical, about $100 billion in there, half of that from historical dollars there and the other half more recent. unfortunately, mr. luetkemeyer, both republican and democrat administrations related to the fed, have used that, in effect, to circumvent the power of congress. the clinton administration used those dollars to provide a bailout to mexico after congress rejected it. the current fed used it to guarantee money market funds. those may have been the appropriate efforts but those decisions should have been made by congress, not by the federal reserve. so under this bill, we end that as a slush fund. we apply the $50 billion to reduce the deficit.

we, in effect, return the fed to what the fed should do in return for congress our constitutional role to act in those matters of emergency. >> what you're trying to do is rein them in and go back to the established principles or mission of what they originally should have been and get it more in line with what most people think the fed's mission should be? >> yes, sir. >> thank you. congressman frank, quickly, with regards to the bill you've got, why do you believe it's important to have -- i'm kind of curious, all of the fed members be appointees versus fed regional president will replace those with appointees, why do you think that's important? >> to say one thing in response to your previous question, the biggest power the fed has to intervene was section 13 of the federal reserve act that came from the early '30s under the

hoover administration and we repealed that under the reform bill and they can no longer do it on an entity by entity basis. secondly, i do think it should be less privatized, yeah. i understand the importance of gee graphical representation, i can't think of a comparable case, of formal governmental power, to set interest rates and the impact they can have on the regulation where the entity primarily concerned picks its own people. >> you're assuming from your comment this is a governmental entity when it really its a quasi-government, and has a lot of private implications from its independence. don't you think it should be more independent in its structure as well? >> independence from the -- i think you get independence with 7 year terms and 14 year terms. i don't think the financial industry that dominates this should be independent from the whole society setting policy

which governs it. you talk about setting interest rates, that's a governmental function. i didn't say they don't exist, to the extent they have some local academic function, they would still be there. i specifically say they shouldn't be voting to set interest rates to the federal open market committee and would be very surprised if someone thought that wasn't a governmental function. >> my time is up. thank you. >> i now recognize mr. ellison of minnesota for his five minutes. >> thank you, mr. chairman. congressman frank, could you describe -- you already have eluded to it a little bit, could elaborate what benefit you see from greater representation from people of diverse experience and the federal reserve's open market committee? >> i have a fundamental belief in the electorate ultimately make the decisions. it is very anomalous.

with there being open seats, half the vote is cast by people and we did a check, who are the members of the boards. it's a kind of closed system. the board members are selected with great input from the president. they in turn pick the regional president and it is private sector governance of an important part of what we do. i am not talking about what they do in their regions and academic activity. the bill says they should not vote on monetary policy. i just don't understand what the rationale is for letting private sector people with the financial industry generally not in every case, be the predominant influence pick the people who come to washington and vote on one of the most important governmental policies, the whole premise of what we talk about. >> congressman frank. >> yeah.

>> i have information that suggests on the board, if i look by profession. >> the regional boards. >> one person from labor, you have four academic, 41 people from banks and 47 people from for profit corporations. do you see any -- >> i think that's a mistake and it's not that bankers are bad people or others, it is that we generally don't say, it's a corporatism, kind of let the profession govern itself. i think that is a mistake when you have a large number from the financial industry and they tend to be very influential in all this, there ought to be a broader representation, again, in voting on monetary policy, not what's done in terms of regional academic activity. these people come to

washington -- i understand people want some geographic diversity, we should do that. it's very surprising to me we don't do that for any other federal agency, we don't say the people in the energy industry or we don't say that votes on labor policy are set by boards where unions are the predominant influence. now, the president appoints people to the nlrb and a republican president will appoint people different than a democratic president but they're presidential appointees subject to senate confirmation. half the votes on the nlrb don't come from groups dominated by labor union, the analog to the fomc votes from regional presidents. >> mr. frank, still have a little time left, on this issue of more diversity on the board, we just talked about professional diversity, also, it seems like there's been a lack

of ethnic and racial diversity, too. do you think that including more voices from consumers who are -- from urban areas, rural areas, people who have dealt with hard hit neighborhoods with foreclosure, do you think these kind of experiences -- >> i think that would be good on the board. but even with that, even if i picked the boards personally, i wouldn't want them voting on federal government policy. i do not think that private citizens should pick other private citizens with no intervention from any electoral process no appointment by anyone elected and not approved by the senate. it's anomalous for people who believe in democratic self governance. yes, i would like to have better representation on these local boards. even with that, i would not want them -- by the way, they tend to be self-selected, i wouldn't want them again voting to set important national policy. everybody acknowledges the monetary policy is very important. some people think it's too loose. i don't understand the

justification for that. i would say and say again to the chairman, i know he wasn't here when we were voting on it, but you also have this situation about whether or not they should be subject to appropriation. i think if you had all presidential appointees and senate confirmation, that would be okay. i think others might say, gee, shouldn't they be subjected to the appropriations process? in any case, as i said i cannot think of a comparable situation where the people in the industry most affected by public policy get to pick a significant number of the formal official policymakers with no intervention by nobody elected to anything. >> thank you. now the gentleman from new jersey, mr. garrett. >> thank you. i will run down a serious question, start at the beginning, mr. brady, i'm not sure i heard the answer to my mind under your definition of the bill i co-sponsor of the sound dollar. is that just the language saying

if we hit our 2% inflationary opposed to anything else? >> it doesn't set an explicit target of 2%, it does not. >> is that something that should be looked at and try to clarify in the bill before it goes forward? >> i'm very open to that and like to see congress set that type of target in a rules-based system. >> does the ranking member have a comment on that point by any chance? >> no. define -- what is it -- i'd be concerned how you would do that statutorily. we're in a world where the dollar has several roles, a domestic role and international role. the international role of the dollar is very significant, especially since we are confronting competitors in the world, people's republic of china primarily, who use the currency. >> for other purposes. >> i would not want to disable ourselves from dealing with that aspect. >> that goes to the next question for both of you. if you did pass legislation

similar to this, how do you know if they are meeting the standard if we don't set a standard and secondly, are there consequences of not meeting the standard we haven't set? >> i think that's a very good question and proves why we shouldn't pass the bill. >> now for the rest of the story. >> the rest of the story. setting the clear mandate, whether we set the explicit target or not, certainly open to that and holding them accountable to that is key. mr. garrett, one point i would like to make, going forward, i think it's a terrible mistake to require all the federal reserve bank presidents to be appoint and confirmed by the senate. one, it will further politicize the federal reserve board including leading to vacancies, as we have today in it. it will concentrate more power on wall street and washington. i think it will be less independent as a fed, because as

you know, regional bank presidents have an independent staff and can actually not rely just on the chairman's staff but on their own to assess economic policy. as you know, finally, the board of governors approves these regional board banks presidents and we already have accountability under this system. >> i sit here and wonder -- what is our role under either scenario. you're saying you don't have that appointment under the ranking member's position it would go through presidential appointment. i can see some benefit to that but then i can also see, we in congress, that's all over the senate as far as monetary policy we're sort of left out except to hear the chairman come and testify this is what they're doing and we have no standing. >> i understand that. i assume that's what you want when you voted not to subject them to the appropriations fund. may i respond? >> i'll reclaim my time. on that, i just wanted to delve into it a little more than the

few minutes we had. >> i did offer an amendment i wasn't for because i wasn't concerned but you voted against subjecting to appropriations process that would seem to me deal with the issue you just raised. >> i'm open to the idea. >> open to the idea that the roof is off. open to the idea there will be much openness for a very long time. >> there is. we're trying to do things a little different in the last session when he moved hundred of pages at a time of legislation. reclaiming my time, ranking member, you did raise one other question, thit thought t question, that i thought would raise -- mr. chairman. with regard to the process, that is the constitutionality of it. you made, i think, a good point saying it would perhaps make it more constitutional if we had the presidential appointment here, not in a private sector but more public sector but raises the fundamental question i thought the chairman would raise, where is the constitutionality for either one of the proposals before here? >> first, mr. garrett, the

suggestion that we rushed things through two years ago, i think we had dozens of roll calls, a lot of meetings. i gather you have some concerns about your own vote but i don't think you should. >> never concerned about my own vote. never concerned about my own vote. concerned about legislation being dropped in at 3:00 in the morning at a conference committee we did not have any hearings on. >> we had vast hearings on. >> that's not the debate we're having here. >> i understand you don't want to talk about your vote against subjecting appropriations. let me say as to constitutionality. >> no. i only like to discuss what we're supposed to be discussing here, and not the way things were held in the past. >> that's part of why we are here today. >> i will answer your question. the constitutionality of my provision what it says in the constitution, important government offices should be appointed to the president subject to confirmation by the senate. i think voting on monetary policy is indisputably an important public policy and ought to be executed by public offices in the constitutional manner. >> for the last word, do you care to chime in. >> congress holds constitutional responsibility for monetary policy.

we have, through history, contracted that outside to the federal reserve bank with a clear mandate. now, lately, a more muddled mandate. to make the point, one, i don't think we want to envision a day where 535 members of congress are setting monetary policy in america. secondly, america is really an outlier here of the 47 central banks and monetary authorities around the world, only two give equal rate to unemployment. only two have in effect a muddled mandate. the others have set price stability as either the primary or hierarchically, single mandate. >> mr. chairman, may i have one sentence? i thought my republican colleagues were in favor of american exceptionlism. >> i wish we would have dealt with that on fannie and freddie years ago, and i do thank

chairman garrett for his efforts to actually resolve the problem. >> gentleman yield, the republicans have been in power -- >> well, if the gentleman would yield, the republicans have been in power since 2011 in january and have done zero on fannie and freddie. what's holding you back? >> i'd like to reclaim the chair's time. >> you've been in power. >> i wish you would. this will conclude the first panel. i do want to thank our two colleagues for a lively discussion and appreciate you very much for being here. now, we will have the second panel be seated. we'd like to introduce the witnesses on our second panel. dr. jeffrey herbenger. the chairman of the department of economics at grove city

college, dr. peter klein is a associate professor of social sciences and director of the mcquinn center for research at the university of missouri. dr. john taylor is the marion robert raymond professor of academics at stanford university and george p. schultz, senior fellow in economics at the hoofhoof -- hoover institute. dr. james galbraith is the lloyd and benson junior chair of government business relations and professor of government at the lyndon b. johnson school of public affairs at the university of texas at austin. dr. alice rivlin is a senior fellow in economic studies at the brookings institution and former vice chair of the federal reserve board of governors. without objection, your written statements will be made part of the record. you will now be recognized for a five minute summary of your testimony and we'll begin with dr. herbener. >> chairman paul, ranking member clay -- >> keep the mike up close.

>> and distinguished members of the committee, it is an honor to appear before you. left to the market the the production of all goods, including money, passes the profit and loss test as socially beneficial production. like all private enterprises, a gold mining company produces the revenue from the sale ever its output exceeds the cost of buying its inputs it's p production is beneficial. in the market money production is regulated by profit and loss. changes in demands bring forth more production. if the demand for money increases making the value of gold coins rise, minting companies would increase production. as the supply of gold coins increased, their value would decline and as the demands for resources increased, their prices would rise. the profit would dissipate and resource allocation into and production of money would be

optimal for society at large. patriotduction of fie -- it is always profitable for a central bank to produce more fiat paper money since larger denomination bills have the same production cost. it's always profitable for a commercial bank to issue more fiduciary media through credit creation since the interest it earns on the loan made always exceeds the nominal cost. although the production cannot be justified by passing the market test of optimal production, it is claimed an elastic currency will render an outcome superior to that of commodity money and 100% money reserve substitutes. let me address three such claims. first, that it can keep the prit level stable. there is no social benefit from a stable price level. entrepreneurs earn profits and avoid losses by anticipating changes in prices of all goods,

including money. and elastic currency makes the entrepreneurial task more difficult by adding another dimension of uncertainty to the purchasing power of money. second, it is claimed that an elastic currency can prevent price deflation. there is no social benefit from preventing price deflation. faced with lower prices, entrepreneurs reduce their demands for inputs and their prices fall also. this leaves profit, production, and real incomes intact. looking at the evidence across 17 countries over 100 years, andrew atkinson and patrick kehoe in a 2004 american economic review article demonstrated there is no correlation between price deflation and economic downturns. the third claim for an elastic currency is that it can accelerate economic growth. there is no social benefit from attempting to accelerate economic growth beyond the rate people refer, however. instead of building up the capital structure of the economy more fully, monetary inflation

through credit expansion generates the boom/bust cycle. in the research in 2010, they concluded that under the fed the economy has suffered more instability than in the decades before the fed's establishment and even its post world war ii performance has not surpassed that of its predecessor, the national banking system. an elastic currency system confers no benefit on society at large. instead, it causes financial instability and business cycles. the fed should be abolishes and a market monetary system of commodity money and money certificates should be established. a direct route to achieve this end is to convert federal reserve notes into redemption claims for gold with a 100% reserve of gold and to redeem the portion of reserve deposits

banks hold at the fed into cash so banks hold 100% cash reserves. at that point production of money and money substitutes should be done by private enterprises under the general laws of commerce. thank you. >> i thank the gentleman. recognize dr. klein. five-minute opening statement. >> thank you, mr. chairman and members, for the opportunity to discuss sup ch an important top. my testimony analyzes the fed abt the reforms considered today from the perspective of an organizational economist. how does the federal reserve system measure up as an organization? are its objectives as mandated by current law achievable and appropriate for a government agency? are these objectives consistent with a healthy and growing economy? ised fed effectively managed, structured, and governed? do key sdecision makers make god

decisions? my answers to these questions are very strongly negative. the fed has been given a task, managing the u.s. economy, that is impossible for any government planning board. the fed has vast authority and very little accountability. the fed can take actions that do enormous harm to the u.s. economy. since 2008 the fed has done exactly that. it has pumped money into the financial system at unprecedented rates. it has kept interest rates near zero, thus discouraging prudent behavior among consumers, entrepreneurs, and government actors while encouraging reckless spending and the accumulation of vast private and public debts. the fed has done everything it can to prevent the market adjustments needed for recovery from the financial crisis. all this has happened without oversight, without external checks and balance, and without public discussion and debate. this kind of setup is a recipe

for disaster. everything we know about organizations with vast authority and without external check and balance tells us that they cannot possibly work well. industrial planning fails because planners cannot and should not pick winners and losers among firms and industries. likewise, monetary planners look the incentives and information to make efficient decisions about open market operations, the discount rate, and reserve requirements. the fed simply does not know the optimal supply of money or the optimal intervention in the banking system. no one does. add the problems facing any public bureaucracy, inefficiency, waste, mission creep, and it's increasingly hard to justify giving so much discretion to a single unaccountable, independent entity. mismanagement of the money supply not only affects the general price level, it also distorts the relative prices of goods and services. this make it is more difficult

for entrepreneurs to weigh the costs and benefits of alternative actions. encouraging them to invest in the wrong activities. that is, to make investments that are not consistent with what consumers are willing and able to buy. devaluing the currency and raising prices by injecting liquidity into the financial system rewards debtors while punishing savers. just as artificially low interest rates reward some market participants at the expense of others. instead of winner picking, we should allow market forces to determine the value of money, the price of loans, the levels of borrowing and saving and the direction of investment. i do support eliminating the dual mandate, getting the fed out of the full employment business. but i would drop the price stability requirement also. the belief that we need a central bank to fight inflation is based on a misunderstanding of the nature and causes of inflation. price levels rise because the central bank has created too much money, not because the

economy is somehow overheating leading the government to cool it off. central banks don't fight inflation, they create it. nor do we need a lender of last resort which prukts not mom and pop savers and investors, but incompetent bank executives and their financial partners. a discretion yaer bailout policy encourages moral hazard. if you know the government stands ready to bail you out, you'll take risks you should not take. instead, we should allow banks to compete with each other and succeed or fail based on their ability to satisfy their customers. reforms such as increasing the number of fed governors, shortening their terms, or changing how they're selected are fine but do not get at the root of the problem. instead, we should replace the old-fashioned central bank with a modern, progressive

market-based alternative such as a commodities standard or competition among currencies. a market-based system would free entrepreneurs from the unpredictable and seemingly arbitrary whims of government planners unleashing entrepreneurs to invest, innova innovate, and grow the economy. not only in the long run, but now when we so desperately need it. thank you. >> thank you. i recognize dr. taylor for five minutes. >> thank you, mr. chairman, for the opportunity, ranking member clay, and thanks for bringing these important issues for public discussion. in your opening remarks you mentioned we have nearly 100 years of federal reserve history to learn from, and it seems to me the lesson is very clear. highly discretionary policy leads to problems and poor performance. more systematic rules-based policy, steady as