trained by friedman. we compromised on language that gave clear reporting, transparency and accountability remarks to the federal reserve in the presence of ultimate attives. but it did not impose anyone's theoretical views. had we done so, i fear the oversight process would have failed long ago. perhaps when classical monoterrorism, the relationship between money and prices fell apart shortly after that. instead being flexible, the process has survived for over 35 years. even though the theories come and go. price stability is written into current law as an objective.

it is the presence of the maximum emploit objective in my view that gives the federal reserve leeway to pursue inflation targeting at some rate other than zero in it chooses to do that. similarly if the federal reseb were to employ a full employment strategy, the language would give you cause to question policies and the reasoning behind it. it would put the federal reseven in the position presently occupied by the european central bank. obliged to ignore unemployment even as that issue becomes increasingly important in the blix of the region it's responsible for. oblijed to pretend to respect its charter when circumstances

dictate that 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. i think it would equally put the congress in an extremely difficult position as unlikely european central bang 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 that creating a rigid price stability mandate would create difficulties that we created over the definition of money. if one looked at the notional definitions of inflation presently in use, i think you would find that the federal reserve did not in fact violate its price stability mandate in

the run up to the great crisis. it's very hard to know before the fact when it was doing something that was not with that mandate. finally this is a time of ferm in economics once again as the 1970s were. the profession fell into complacency before the great crisis and the crisis delivered a shock from which economics has not recovered. 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 resefb can achieve. reasonable price stability which was the language in the humphrey hawkins preamble is an important objective but this is full or maximum employment and i think congress would be well advised

not to commit to one -- to either one at the sacrifice of the other. i do urge congress to continue to pursue the goals of oversight, accountability and to probe deeply what the federal reserve is doing, but within the framework of present law. thank you very much. >> i thank you now and 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 feds policy actions to fostering stable prices alone. i'd like to make clear at the outset, mr. chairman, that i believe in a strong independent central bank. without a strong independent central bank, functioning to mitigate economic 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 economic policy including monetary policy should be a rising standard of living for most people over the long run. controlling inflation is a crucial almost 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 a ugt to expect their central bank to do. let the economy create as many jobs as possible, but don't let inflation interfere with that job growth. economists translate that common sense exhortation into a monetary policy aimed at keeping the economy as close as possible to its long run potential growth without seriously overshooting in other direction.

this concept in enshrined in professor taylor's famous rule. the problem for the federal reserve decision makers is that potential growth is not observable because it depends on trends and productivity growth which can shift unexpectedly. in the stagflation of the 1970s, hindsight indicates that monetary policymakers overestimated potential growth and did not tighten soon enough to avoid the acceleration of inflation at the end to have decade. in the '9 0z when i was at the fed, we faced a happier version of the same uncertainty. we had unemployment that was 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 inadequatesy of the fed's tool kit in response to asset price bubbles. the dot-com double, if the fed ratzed the interest rates it would have tipped the economy into recession punishing workers and companies for no good reason. influencing the funds rate is not an effective way of calming an asset price 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 not inconsistent with strong emphasis on controlling inflation when proper and even with an explicit 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 that the feds 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 i'm ply that serious -- that inflation is a serious current threat to american prosperity, which seems to me unwarranted. what we need now is a continuation of accommodative 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 positive track record and is currently appropriate. i would urge the congress not to tamper with legislative language what that has served us well. thank you. >> i thank the panel and i now yield myself five minutes for questioning. first off, i'd like to address my question to dr. kline. today with our previous panel plus 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 perspective. how crucial is it? how much difference would it make. i know you have a different opinion about the overall picture and the monetary system. we're not only 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 there's a single or a dual mandate? >> i don't see too much evidence -- >> make sure i can hear you. >> i don't see too much evidence in the performance of the fed the concentration on one wing of the man do it 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 it inflated to the extent of creating the stock market bubble of 8 that burst and gave us the recession in 1990-991. in other eras where they've concentrated more on unemployment their performance likewise has not been spectacular it's been somewhat similar, i think and so i don't

think in practice that the dual mandate has been effective in restraining the feds monetary policy or improving it one way or the other. >> 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 -- to be acome dative and increase credit rather than to be contractionry. i would be more concerned about an emphasis on full employment which is sort of encourages the fed to go in the direction that it wants to go anywhere. i'd be less concerned about it relatively speaking with emphasis on price stability and go against the fed and go in the direction it wanted to go. >> the argument it didn't restrain them is precisely the reason they liked the mandate because it allows them to expand

the money at will. and of course we see this as a problem. quick question for dr. taylor you're mfdsing some of these monetary rules. and even more monetary statistics, would you be in favor of the fed once again issuing a report on this size and growth of m 3? >> i would be in favor of the fed doing that. i think it's more emphasis on money statistics, the better in my view. they didn't pay enough attention to that. but 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. so that's the fed's job. you come to this hearing and report the strategy explicitly like they did about the ms which i think was constructive. it also requires the congress, this committee to ask the questions about the strategy. i think that dialogue's very

important. i wish we'd go back to that. >> dr., i tend to agree with you about the constitutionality of appointments to the board. we obviously have a different opinion about what we should be doing with the monetary policy and federal reseven. 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, i would be cautious about tangle with you on this, that the authority for the federal reserve act simply comes from the authority given to congress to coin money to 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 ground. >> of course, if there's a prohibition to constitution you can't change constitution by the federal reseven act. dr. rivlin, i think the removal of the report on m 3 came after i think you left the fed. i'm not sure. why was that dropped? what would have it harmed us to know a little bit about the broad money supply. it seemed like it emphasizes a point of money growth and many believe still that the true price inflation as a consequence of money growth. is there any reason that we shouldn't have that figure presented to us? why was it cancelled out? >> i don't know that was i believe after i left. but i'm always in favor of more

information rather than less. but the emphasis on the monetary aggregates was declining for a good reason. they weren't stable with respect to anything. and we had all sorts of different kinds of money created in the last few decades. and the idea that it was mostly checking accounts and savings accounts is just disappeared. >> i would like to see more attention given to the stableness or this -- the 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'm going to 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. and you're always weighing different 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. and so we continued i think -- thinking we were in conjunction with both mandates to keep

interest rates relatively low. >> and inflation was falling because the economy was robust. it was growing jobs. and that was because the administration was working with congress to help the economy along. is that correct? >> we had a restrictive fiscal policy in this period. we were trying to get bag back to a balanced bug which soubds like a fantasy now and we did it. so the fed's job was easier at that moment because the fiscal policy was cite restrictive. >> thank you for that response. and dr. gal brait, as an architect of the dual mandate, can you share with this committee the vision and the

need that the two legislative authors had for the dual mandate back then senator humphrey and congressman hawkins. >> yes, congressman. >> please, turn on your microphone. >> i had the bring of working directly with congressman hawkins at that time. of course, an economic 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 economic 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. and it also ended up clarifying what was meant by purchasing power. that's where the reasonable price stability came into the

preamble. so it was a way of broadly specifying economic policy objectives for the entire government. but also with respect to the federal reserve, this was the moment we had set up through 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, as professor taylor has said goals for the growth of various monetary aggregates, which over time has dr. rivlin has just said became less useful because the relationship between those objectives or those statistics and anything you ultimately cared about became much noisier and less reliable. >> thank you for that response.

dr. kline, being from missouri, my home state, let me ask you about something that americans are 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? the price of gasoline and the price of oil fall a little bit outside the mandate of the monetary authority. so certainly rising energy prices is one manifestation of a monetary policy that's overly accommodative. for energy prices 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 per view of congress or the executive branch, but in any view, there's not much that the federal reserve system can or should be doing about that. >> thanks for your response. i yield back. >> i now recognize the gentle lady from new york, dr. hayworth. >> thank you, mr. chairman, 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 vigorously and as urgently as we do and legitimately so under 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 fisk. to me it strikes me when we talk about the mandates for the fed and the way in which it op rits, again, thinking about our conversations with chairman bernanke, that so much of what the fed has felt compelled to do, if you will, i realize i'm using some loose interpretation of that, has been in response to the fact that we have a federal government that fundamentally has continued and at an accelerating rate over the past few years to mismanage, if you will large segments of the economy. dr. kline, perhaps you could start with that, pleas

think of branchs and the fed to be antagonists competing against each other or playing off each other. 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. the fed facilitates government expenditures and government borrowing that 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. the fed has been the government's enabler to a certain extent. that's part of our problem. it's very difficult to use monetary policy to endlessly

accommodate what we've taken on. >> yes, i agree with that. >> yes, i agree as well. it creates a 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. the federal reserve has provided what you describe as an alternative to acts. 57% of the debt issued by the government. that's a big intervention. i think there's a monetary policy is itself part of the

problem now, given what it's done. but fiscal policy obviously is a problem as is regulatory policy. the idea of working hand in hand heads to the kind of problems that we've seen already. that's why i think the questions about the mandate are important. >> that indeed is why myself have become a co-sponsor of the representative's bill because of that moral hazard issue. i'm eager to hear. >> i think many of our problems now are due to a disastrous deraeglation and desupervision of the financial sector which led to a catastrophic meltdown of that industry and of theal vennsy of much of the american

middle class. unemployment revenues fall, unemployment payments go up. other kinds of stabilizing payments go up. we are much better off for having a launch federal government, federal budget that can stabilize the economy in this situation than we would be in we didn't have it. we didn't have it many the 1930s and our output fell by about 1/3. the overall decline was much less this time around that was because incomes were substantially stabilized by fiscal actions of the government. >> we've got a lot of food for thought. you've defined the crux of the con strast. thank you chairman, very much, i yield back. >> thank you. i now recognize the gentleman from arizona.

>> forgive me blavrns sheet by acquiring so much u.s. solvent paper, so much marge backed mbs. at some point does it create a type of distortion in the market either by dramcally low interest rates over here and some some point it's a bond bubble. it's a cascade effect on on their own holdings itself. and is that just as right now we have the discussion about are we heading towards the student loan

bubble because we're a trillion there. we're heading to $3 trillion on the fed balance sheet. it'sal little essteric. drrks, please, share with me is my concern unfunned? >> i think the fed balance sheet exhibits the source of the bubbles that man in the economy. when we see the feds balance sheet or they buy mortgage backed securities from the bank and so on. generate reserves then it creates the possibility of the bans just creating credit on the basis of these reserves and channels this credit into particular lines of activity where the bubbles arise. so this is the very process by which the asset price bubbles are generated in the economy.

we caan uls a tell exactly what lines they'll be generated in just by looking at the feds balance sheet because the banks -- >> dr. riff kin, you will not remember, but many years ago i ran into you walking down the street and you were very, very kind to me. you spent literally ten, 15 minutes just talking to me on the street about some other issues. i've always been 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 balance sheet effect. because monetary policy is not a good tool for dealing with asset price bubbles. it's a good tool for dealing with general price inflation. so the fed needs different