credit -- specific credit controls and controls on excessive leverage to deal with bubbles and the dodd frank act does put them in that business. i think that's good. >> could current fed action could sort of the current fed balance sheet and mechanics there could it also be leading to a bond bubble? if we start to move towards more normalized interest rates, which we created so much paper that's in many ways artificial rates, does it create a cascade when we start to move. >> i don't think it has to. i think the fed can get its balance sheet down quickly. it's always much easier for the fed to be less acome dative than more. i'm not worried about this astonishing balance sheet.

it's very big. right now the reason to worry would be that we had general inflation and we don't. >> i think it would be very hard -- >> we may have to hit the mic. >> i think it would be very hard for the federal reserve to raise interest rates rapidly. and i don't think it's likely to do so. is there a situation and one way to interpret your question a situation in which is marks might sell off u.s. bonds rapidly without that being controllable by monetary policy action. i think that's also unlikely, under present conditions. what the markets have shown us is that in adversity people want to hold u.s. bonds. they want to hold u.s. bonds over practically any other asset because twer largest, most liquid and completely reliable market many the world for safe liquid assets. >> i'm sorry how much more

capacity do you believe is pragmatic for the fed to continue to grow at? do they go to a $4 trillion, tlrs 5 trillion. how dig do the balance sheets get? >> that's a very interesting question, for which i don't have an answer. >> mr. chairman, thank you for yielding. >> thank you very much. we're going to have a brief second round, if you're able to stay. i have a question for dr. rivlin and for dr. kline. i don't want to get in so much on the cause, but i'm trying to get an assessment on how serious you think the world financial crisis is. a lot of us, you know, put a lot of blame on monetary policy and federal reserve and the dollar reserve standard and excessive debt in these issues. we're not going to resolve today who's to blame. but do you consider the world financial situation to be a mess or just something that will be

taken care of soon and there's not that much to worry about? >> i'm very worried about europe. i think the austerity policies are the wrong policies at the moment. but after the -- they'll make the situation worse. and that would be bad for us. the long run debt situation in europe is serious. but at the moment i would focus attention on their getting out of the recession. for us, i think we've got to get out of this recession, too, we've got to get our long run debt out of control. i think we can, but we haven't. right, could you follow up, dr. kline. >> i think it's a huge crisis both in europe and in the u.s. with tremendous consequences. not only the crisis itself, but in my view the response to the crisis by the monetary authority, the hugely accommodative policy, the zero

interest rates and so on have taken a bad situation and sewn the seeds for making the situation worse. we haven't seen substantial price rises in the price level since 2008. if relook at the money pumped into the system there's simply no theoretical model of which i'm aware no impeerical study that i can cite in which those kinds of actions do not have very serious long run consequences on price inflation. so i think we haven't seen the worst of the results that concern policy is bringing about. >> thank you. i yield to mr. clay. >> thank you mr. chairman. i would like to start with the panel wide question perhaps you can briefly try to answer.

starting with dr. herbner. do you think the federal reserve's monetary policy execution would be more effective if it's set explicit inflation targets and were held accountable to those targets? >> not really. i think when the fed engages in any kind of expansion their monetary policy they always generate the same ill effect in the economy. they always generate some kind of credit expansion which leads to a pattern of malinvestments even when when they keep overall levels stable. these lines of malinvestment is the sort of thing we saw in the

1920s very similarly also in the 1980s so even if there were stable price level targets that the fed could hit, they would still generate the same kind of financial instability and patterns of malinvestments and the necessary liquid dags. >> how about dchlt kline. your opinion. r kwloovsh -- >> something mentioned in the first round was the ideas of increased productivity resulting in decreases in prices as of course we see in many entries, computers, information technology and so on. there's no reason that we should expect or desire quote unquote stable price level of 2% a year or whatever. in a growing economy we might easily expect the price level to fall. that's exactly what happened

during the 19th sermry in the u.s., which was the period of -- of the strongest sustained economic growth in u.s. history that increased growth which was driven by productivity improvements resulted in a decreasing average price levels. there's no reason for policy to try to prevent that. >> tur. dr. taylor. we already have an inflation target the med has hay news conferenced 2 pert. in the meantime we continue with this highly interventionist policy. it seems to me it's not enough. that's why people talk about the dual mandate. that's why i'm talking about reporting about the strategy of the fed. i think you need more than that to get out of the terrible situation we're in now. >> thank you. >> i think explicit targets can be useful in. the hum fro-hawkins law there was an internet target for unemployment and 3% inflation to

be achieved in four years. >> dr. rivlin, your opinion? >> ill agree with that. i think that the 2% target is about right. i wasn't a big enthusist of setting an explicit target. but 2% is about right. as long as you don't take it too seriously. there might be reasons to deviate in one direction or another. >> thank you so much. mr. chairman, i yield back. >> i now recognize the gentleman from arizona for a follow up. >> thank you.

we were sort of heading on the question i was concerned with dr. taylor and moved to dr. kline. how big can the balance sheet get? >> i think it's too big. >> can you pull the mic closer, please. >> i think that quantity ittive easing qe 1 and qe 2 were not appropriate. and that's why the balance sheet is as big as it is. if we had done the intervention during the panic period, the balance sheet would be back to normal. i don't see any evidence those are helpful. i've done rauch on qe 1. i think it's already too big. i do worry about the size of it already because it has to be pulled out or there will be a bubble. right now we're running the ris okay-a bubble because of the commitment to hole rates for so low for so long. i think when you talk about bubbles and we talk about the feds efforts to stop bubbles, is problem is more is the fed causing bubbles rather than the

responsibility to deal with them. so i see that concern dm the housing bubble. i see some other bubbles in the past. you think about bubbles let's not forget the fact that the fed itself can and in fact has in the past caused bubbles it may be doing that again right now. >> dr. kline. >> i agree strongly with what dr. taylor has said about the fed being the cause of bubbles and the idea that the fed needs additional tools to be able to pop bubble whence they emerge is taking the wrong view of the nauch and sources of those bubbles. as to your question about balance sheet, i agree with dr. taylor, but would add it isn't just the overall size of the balance sheet that matters, it's the composition of the balance sheet. my concern as a micro economist in looking at quantity ittive easing and other intervention by the fed, is not so much their effect on fed's overall balance sheet, but the effect on particular firms and industries. the winner picking preventing

restructuring that are needed to get the economy become on the right track is just as important as looking at the overall size of the balance sheet. >> then we're going to bounce back. do you have a comment on how big the balance sheets can get and does the mix or size create both a distortive effect on the allocation of capital? >> as i said earlier i don't have a clear view on how big the balance sheet might get. i do think that as one looks at the composition of the balance sheet what's in the portfolio, one has to efl the call of the assets. that is a process which has ramifications for a structure going forward. there comes a point when you do need to address those questions. >> i would add one thing. most of us would agree that the real problem is how exactly is the fed going to unwind the

balance sheet, not how big is it going to get. what will be the process by which take these assets off of their books and what will the preprocushions be in markets when they begin this process seriously of unwinding things. >> there goes my bond bubble concern. what do i know? dr. rivlin. you've been outspoken on fiscal policy and that's always been appreciative to have other voices out there saying we have some great difficulties. has the fact that the fed has been able to grow its balance sheets to many levels has that been a way to help congress avoid fiscal policy?

>> i don't think so. i think the congress has not wanted to face up to the hard choices. and the feds buying bonds is a small part of the whole world buying bonds. counter to reality the world believes that we're a very safe investment. >> but u.s. southern debt issues over the last 24 months hasn't the fed represented close to half or -- >> i don't know exactly what the figure is. but right now we can't have a rapid reduction in our national borrowing because it would derail the recovery. so i don't think the fed has much of a choice. i would be cautious about increasing the balance sheet much further. i don't think there's an answer to your question about how big

can it get. right now we need a double kind of fiscal followsy. it shouldn't be too severe in the short run, but we've got to get the long-term debt you should control. >> mr. chairman, thank you. >> i recognize mr. green from texas. >> thank you, mr. chairman. i thank you and the ranking member for calling us to this hearing today. i thank the witnesses for being in attendance. mr. chairman, i thank you because i'm one of the members who signed the letter requesting such a hearing and i thank you for honoring the request to the witnesses let's start with something very basic. the bills that we have range from tweaking to the abolishing of the fed. i'm curious how much of you are of the opinion that we could totally eliminate the fed. is there anyone that thinks it

should be abolished? >> if fed should be abolished because the conduct of monetary policy under the fed can bring no benefit to society at large. as i -- >> in your opinion, the fed will make bed decisions every time there will be no good decisions made. it can't have the positive impact on the economy? >> i would say that there's no other instance where the government has completely monopolized the production of something on the market. >> i'm going to have to accept

that as your answer. >> we can talk about the federal reserve system as an example of a central bank or the institution of a central banking more generally. i give examples why it's not needed but also harmful. in your opinion there shoild not be a central bank in the united states of america? >> yes, sir. we don't have a central automobile manufacturer or dairy. >> how do you juxtapose that with central banks around the world where major countries in the world all have central banks? >> when i'm expoupding is not the majority view among policymakers. but that hardly makes it incorrect. >> i think that's a fair statement. mr. taylor. >> i think we should reform the fed. i think the evidence especially in the last few years is that the policy's not working. i look back in history and i see the 80s and 90s part of the time when alice rivlin was on the fed

and things worked pretty well. it wasn't intervening like it is now. it worked. i think we need to get back to that. i call it a more rules based policy. i think some of the reforms we're discussing today will help us get back to that. >> next please. >> i think on the whole congressman, that the 20th century was better than the 19th and that having a central bank was a modest, useful part of the institutional structure it gave us a fairly successful century. i'm very cautious about taking radical institutional steps when there is very little going on in the world that would give us confidence that they would be stabilizing rather than destabilizing. >> all right. doctor? >> i feel strongly that we need a strong and independent central bank. i think the evidence of the 19th century is not as encouraging as

some would think. and the idea that the world's greatest economy could make due without a central bank, without a listeneder of last resort, without a monetary policy, seems to me quite bizarre. >> drrk. thank you. the question is, would we be at a disadvantage if we had no central bank and other major economic powers had central banks? >> i think we would be. i think we'd lose our preeminence as a great -- >> would the currency supremacy, the dollar is a fairly well accepted currency around the world. would it have an impact on the dollar. >> yes, i think it would.

>> the next person, please. >> it clearly would have an impact. it would make the dollar, the u.s. treasury bonds much riskier. >> mr. taylor. >> i don't recommend abollishing the fed. i recommend reforming the fed. >> would we be at a disadvantage if we had no central bank and other countries did? >> it depends how such a reform would be implemented. right now people are fleeing from the dollar and heading towards hard assets like precious metals. >> sir. >> the dollar was backed by gold i don't see how -- >> you would back the dollar with gold. >> yes, sir. >> thank you, mr. chairman. >> thank you. i now recognize the gentle lady from new york. >> i'm sorry. thank you, mr. chairman. i have a thought for us as we conclude and i thank you so much for your insights each of you. it strikes me that the size of

the fed's balance sheet is going to be largely determined ichb the structure of our democracy by the will of the american people to take in hand what we have created for ourselves at this juncture in our history. is there any sense that it really it's going to take a lot of political will, if you will, to get our fisk in order for us really to, unless there's some significant change many the role of the the or the structure of the fed. i think so much is going to lie in how we manage our budget going forward. >> i strongly agree with that. i served on the simpson bowles commission and other groups that have all come to the conclusion that we really need to get our fiscal house in order so that the debt is not rising faster

than our economy can grow. that's going to take hard decisions and we've got to do it. >> thank you for your service. it is much appreciated. dr. kline, i'm sorry, i'll flip back around. >> of course, i agree. this is a tremendous political challenge. whether it takes a major crisis to call forth the political will to make the necessary changes, i don't know. i would hope that this body and others would be able to push things in the right direction without waiting for the bomb to fall out. >> right. dr. hebner do you think what we're viewing in europe we should take as a portent of thins to come if we don't do something? >> our situation is perhaps even more precarious than theirs given what the fed has done in the wake of the crisis to bail out the banking system. again, it's going to take strong action against some of the

political interests that exist here to turn things around before as dr. kline said there's a crisis and then we have to do something. >> right. dr. taylor, your thoughts. >> fiscal policy is certainly a mess right now. and it's got to be fixed or we'll be -- we'll be like europe. please don't forget about monetary policy. it tend to be arcane. it tends to make people tune out. it's difficult, but it is essential right now to get right. i don't want to see a future where quantitative easing becomes the new monetary policy. >> in view of what you said regarding the fed's purchase of treasuries and the proportion of treasuriries that have gone to the fed, is fl a certain crowding out effect that we might also be witnessing.

>> eventually, of course. in the meantime, the figure is 77%. the am of debt increase in fiscal year 2011, 77% of that was the fed. and that's a gigantic amount. so crowding out, i believe there is crowding out about that even though the economy's weak. crowding out can occur in a weakened economy. >> feels as though the federal investments are crowding out -- >> crowding out occurs because of the feoff sitsen the borrowing even in a weak economy i believe it occurs. adds the economy picks up, it will be more of a concern. >> we're also art financial officially in you will in a sense because of what the fed is endeavoring to do or artificially making the pictures for treasury lock rowsier than a real marketplace for them. >> when i think about what the fed is doing now with respect to oversized balance sheet and efblgively dictating what the short-term interest rate will be, it doesn't set it many the

market. it dictates by telling what the reserves interest rates will be. as the fed has replaced the entire money market with itself, i tell you we just don't know all the implication of that. nobody knows the implication of that. the sooner we get back to normal where the supply and demand for money is determining that interest rate and the interest rate is set according to reasonable methodology and report to the congress the strategy for doing that, the better off we'll be. >> it's not merely a central bank, it becomes an uh-huh ber bank in a sense. >> thank you so much. i want to thank the panel today for your time and your testimony. i found the hearings very fascinating because even though we might not agree on the cause, it seemed like there was a general consensus that we have a problem and we have to deal with it. it's not just the united states it's worldwide.

my guess is some day we will look at the management of a central bank or whether or not we really need a central bank, ultimately we'll talk about the nature of money, the deaf nation of money, it's pretty hard to manage something you can't define. once again, thank you very much for coming today. c-span's congressional directory is a complete guide to the 112th congress. inside you'll find contact information, district maps and committee assignments. also information on cabinet members, supreme court justices and the nation's governors. you can get a copy for $12.95 plus shipping and handling by

ordering online at cspan.org/shop. the school was funned by televangelist jerry fall well and mr. romney will be introduced by jerry fall well junior. that's saturday. north dakota senator john hoe venn joins us this weekend on news makers. he answers questions about the transportation will in congress, oil and gas drilling and republican efforts to increase pentagon spending ant consult domestic spending. news makers is on c-span sunday at 10:00 a.m. and 6:00 p.m. eastern. this is c-span3 with politics and public affairs programming

throughout the week and every weekend 48 hours of people and events telling the american story on american history tv. get our schedules and see past programs at our websites. you can join in the conversation on social media sites. housing and urban development secretary calleds on congress to pass legislation making it easier for homeowners to refinance. he said it would save homeowners money on their monthly payments and boost the housing markets. >> this committee will come to order. our housing market faces dual problems.

it is creating impediments to facing the problem the need for large scale long-term housing financial reform. the committee continues to be concerned about the long-term structure of the housing finance system, today's hearing takes a closer look at one of the strategies to improve this turbulent housing market. during our hearings on the state of the housing market, several witnesses including secretary donovan discussed the need to expand financing opportunities for borrowers who are paying their mortgage. ill like to thank the secretary for coming back to discuss this topic if greater detail. in january, the federal reserve released a white paper entitled the u.s. housing market current

conditions and policy considerations. in this paper the fed said the housing market poses a significant barrier to more rigorous economic recovery. one of the bieriers identified in the white paper includes obstacles to refinancing at today's low interest rates. the plan identifies removing barriers as part of the solution. while fhfa made some changes to the program last year at the urging of members of congress and the administration, i continued to hear from constituents and the housing industry that more could be done to encourage competition in the refinancing market and give homeowners more