Transcripts For CSPAN2 K Nattgtbtol Hill Hearings 20140110

Negotiation that has to take place. And it needs to involve people who represent several different points of view, both from within the ruling party and outside. And that observation brings me to mr. Pendergast. After the Security Councils approval of additional peacekeeping troops for south sudan last month, you commented that the political and diplomatic elements of International Responses to most african conflicts have been slow and ineffective. Which have put more pressure on peacekeeping missions than they have the wherewithal to fully adept, to which theyre totally unprepared. Can you talk about this . Id like to go into greater depth of the context of the Current Situation in south sudan. And why its important for the peacekeeping missions to be accompanied by very rigorous diplomatic engagement from members of the International Community, particularly the United States. Thanks, senator. Yeah. You look at the three biggest missions today on the african continent, south sudan, darfur, and eastern congo, american taxpayers on the hook for almost 30 of or well over 3 billion a year in supporting peacekeeping missions there. But in all three of those cases, you could argue the corresponding political investment was not equal to the investment in the deployment of military force. In south sudan, everyone has discussed that there has there was probably not enough International Efforts undertaken to try to prevent the conflict between and i agree totally with my fellow panelists, this political dispute, which goes back, of course, decades between the two factions that are now battling. The lack of an international engagement, a deep engagement, a transparent engagement to try to prevent conflict i think is something we need to look at. In congress, we didnt have much of a political process for years until finally the u. N. Appointed Mary Robinson and the u. S. Appointed senator feingold, the former members of this committee. And now were starting to see the construction of a credible, serious peace process. And b, the deployment of real force that helps change the game on the ground in eastern congo. And in darfur, we have this endless peacekeeping mission that made absolutely no progress in dealing with the political roots, the political drivers of violence throughout sudan. So i think thats where we really are missing we invested a great deal. Sort of the old military adage. If all you got is a hammer, everything looks like a nail. We just keep throwing these peacekeeping forces into these situations without investing the preventative diplomacy. Now princeton was the special envoy for the United States. And when he was in office, until march 2013, he was actively engaging with the parties in south sudan and helping to prevent a deterioration. But there was a long gap between his the end of his term and the beginning of the next one, and there isnt another country thats really engaged like we are in that kind of preventative diplomacy. No headlines. Nobody cares that people are out there doing that stuff. And you dont get any credit if you actually prevent something. But thats what we need to be investing in. Thats what isnt happening in south sudan because we vn invested the resources in helping to build that real serious political process. Haven invested the resources in helping to build that real serious political process. That will allow for the resolution of these horrible, deadly conflicts. I smile when you say you dont get any credit for preventing things, its so true. But yet it is probably the most successful element of what we do. Final question, ms. Knopf. You made an interesting observation, that for us to be successful in south sudan, you have to have parties that have a history, have an understanding, have an engagement. So i would assume based upon that comment, maybe im wrong, that maybe we dont have all the parties that would bring us to the successful conclusion. Are there some missing parties or types of resources we should be bringing that arent there right now . The critical issue at the moment is the drawdown of the u. S. Embassy and u. S. Aide staff. Without having diplomats on the ground, resident there, talking to parties across all sides of this crisis and getting out beyond juba and the capital as well, that becomes very, very difficult to adjust to. Secondly, for aid programs to be effective, we need to have both Development Experts and the humanitarian professionals, most especially at this moment in time, to be as close to the situations that theyre trying to ameliorate as possible, and to be in Constant Contact with local partners with the south sudanese who are at risk and in need of assistance. Daily and hourly coordination with the other elements of the National Humanitarian response front. Doing this offshore from nairobi at the moment where the Disaster Assistance Response Team is based, it takes us back to i dont even know, before 2002, 2001 in terms of how we used to manage humanitarian response in southern sudan. Its woefully inadequate and will impact our ability to be Effect Initiative the long run. We have deep, deep expertise, as was said in the u. S. Government and in the International Community and with americans in implementing partners such as ngos and other international organizations. They need to be there in order to respond. Senator . Sorry i missed the testimony. Im told about this being a division of ethnicity as well. Of course, thats often the case. What is the percentage of the president s well, the dinka tribe constitutes what percentage of the country . I dont have that figure, but its the largest group. There are a lot of subgroups. And that too is a factor. The Second Largest Group is largely supporting machar. But i dont have the percentages, im sorry, but i can get them to you. Were just consulting. 30, 35 is dinka. 65 tribes and ethnic groups in south sudan. 65. I was asking the other panel, some of the other questions there, the u. N. Peacekeeping forces that are there now, how effective are they at preventing bloodshed, or what can we do to help that group . Is it just a number of numbers or mission . What can we do at this point . Well, let me comment on that. Both of the things youve mentioned first of all, they dont have enough troops there, and the action by the Security Council was important. But its very hard to get countries to contribute and find air support and equipment. And that just has to take a lot of intensive effort by us and others to make sure they get there. But second, it has to be made very clear that theyre going to be aggressively protecting civilians. Which means that those compounds will not be allowed to be breached, and theyre prepared to defend them with weapons, if that takes place. They have to be aggressively patrolling. Now, they havent played that role up to now. They havent seen that as their mission. But i think that has to become part of it, and they have to look ahead to how they will monitor a cease fire. And how they will be out there aggressively doing so and reporting violations to the Security Council. So these are things they havent been doing. It wasnt in their original thought. They were now theyve got a new desperately important protection role. And they need more people and they need a very aggressive mandate. Any differences there or comments . Totally agree. The 32nd footnote and again, its a wider phenomenon. We send peacekeeping forces, missions to do a laundry list of things, and when the stuff hits the fan, we want them to protect civilians. Theyre not prepared to do that. You have to organize, as you know, and deploy provision and have the expertise to undertake civilian protection mission. These guys werent ready for that. So now they have to get up to speed and thats going to taking a while. I guess my two cents on this would be, they have what they need to go out and do these things, to defend and patrol and to monitor ceasefires. But the world turned upside down in just under four weeks in south sudan. This is not what they were initially there to do. While the potential for conflict, of course, has been there and is not a surprise, the fact that it has fallen apart so quickly and so dramatically, it takes a moment, i think, for everybody to adjust and to understand and retool for the new challenges and the new realities. So i dont think theres lots that one can say about the performance, but they were there to do a state mission. Now they have to do a very different mission. So theyve got the mandate. Its the numbers issue for the most part. The irony is that south sudan opposed the chapter 7 mandate. Said we dont have any internal security problems. Unfortunately, Security Council saw otherwise. Thank you. With regard to u. S. Assistance, state building or humanitarian, does that represent leverage thats effective at all . Ambassador thomas grayfield seemed to know the restrictions we have here in congress, in terms of aid and assistance after a coup. Does that represent the leverage that we can use . Is it effective at all . Or just on the margins . No, i think it was a very important statement by the United States. That we would not recognize a military takeover. President kiir, for all his faults, is a dramatically elected president. And you have to build on that. Just saying anybody can come in and take over is going to undermine a lot of things. So i think it was important. Whether the aid levels matter to people like machar, its hard to say. I think secretary greenfield suggested that probably in itself is not. But International Recognition is important. So i think making that statement is important. But then the burden falls on president kiir to play his role much more effectively. And heres another irony. President kiir was proud of the fact and mired for the fact that he was the one that created the unity of all these different groups in the runup to independence. He brought in all these factions, etc. He created a broad based government. He invited machar to be vice president. It was one of his accomplishments. It was one of the reasons he was so supported. Unfortunately, hes moved in a different direction. He sees all his critics as enemies. Hes relying on intelligence people and harassers, etc. Its unfortunate, because his original contribution is being lost. Thank you. If i can just add, my personal knowledge of the two main parties here is the threat to cut off our assistance, our Development Assistance. Its not whats going to motivate them to come to the table and get the ceasefire done, arrive at an interim political assessment. It will hurt the people of south sudan. We know how to do it in the midst of conflict. We have many modalities for how to provide assistance, either with the cooperation of the government or working through other avenues, local and International Partners and sub National Levels of government. There are stable areas of the country. We should not stop Development Assistance in the stable areas of the country. Its very important to help keep the conflict from spreading and to not lose the gains weve already made. As well, United States assistance has been vital with the economy with the central bank of south sudan, picking up the pieces economically when this is all done will be much, much harder if we pull that support out now. So i do think that its important and imperative that Development Assistance continue. That the modalities be examined. That the strategies be updated as the situation changes. But that we keep the commitment to the people of south sudan and not harm them further. And one last point. The building leverage is critical. Thats what weve got to be looking for all the time. The aid doesnt i agree. The aid doesnt make a big difference to these guys. But it does make a big difference to the people of south sudan and to the building of institutions in the long run. Pulling that away now would really undermine the longterm stability of the place. Our leverage i think should focus on individual culpability. The targeting sanctions, prosecution of people who are found to be committing or planning atrocities and patterns of atrocities. The additional leverage comes if we work much more closely and transpare transparently. Collectively pressure the parties when there are key point moments that there needs to be a push. Again, i just view a very high level white house to state house in beijing engagement in south sudan to be a critical thing to do right now in order to show that united front internationally to the parties that were really going to be pushing for peace, and those that undermine peace are going to have some kind of particular sanction. Is it your assessment that china is willing to step up to the plate in that regard . Not as publicly as us. But their interests are much deeper in terms of National Security than ours are, and so lets figure out and i think that the good news is that our interests in terms of what the end game is line up very clearly with china. So lets take advantage of that moment. It doesnt happen off globally and figure out how we can more deeply work with them. Thank you. Thank you. One last question on that issue that mr. Pendergast mentioned about looking for leverage and targeting sanctions of those human rights violations, since youve been intimately involved until very krecently. Do you view that as among others a good leverage point . I think its going to be extremely important in another way. I think personally in the process over the next few years of writing a new constitution and laying a new foundation, that that creates the basis for eliminating from future power a lot of people who are responsible, so whether its in the process of prosecution or some other kind of commission, a lot of people who are very guilty of the kind of terrible violations should not be part of a new government after 2015. Outc thaink that is one of the with the thanks of the committee for your invaluable testimony, i expect that the african subcommittee as was the full committee will lend continuing attention to the challenges in south sudan, and the leaders on all sides need to recognize that reality which is not a single hearing at a sink or moment. The attention the committee will be focused on them continuously. The record will be open until the close of business tomorrow, and with the thanks of the committee, this hearing is adjourned. A Labor Department released its monthly jobs figures an Associated Press story reads in part, u. S. Employers added a scant 74,000 jobs in december, the fewest in three years. The Labor Department said the Unemployment Rate fell from 7 in november to 6. 7 , the lowest level since october 2008. The drop occurred partly because more americans stopped looking for jobs. The government counts people as unemployed only if theyre actively searching for work. That from the ap. House Speaker John Boehner released a statement this morning on those numbers saying todays disappointing report shows once again that the president s policies are failing to Many Americans, many of whom have simply stopped looking for work. Also releasing a statement, Senate Majority leader harry reid. He wrote the unemployment numbers were also the topic of the joint Economic Committee hearing this morning. The commission of the peer of labor statistics testified and here is part of her testimony. Thank you, commissioner but as you know the Unemployment Rate that fell dramatically. Do you see this as, which he described as an encouraging sign of a sustainable recovery . This is a one this is one month number. Dont want to get hung up on one particular number, but most of the change in the Unemployment Rate, twothirds of it probably was due to fall in Labor Force Participation which is people simply giving up on the market, the workforce . The interesting thing is when you look at lowes it looked like most of the flows into nonparticipation were from employment rather than from unemployment. But generally speaking, its not as robust a time if the fall in unemployment have become from creation of jobs. Do you think that drop, is that a troubling indicator . A concerning indicator . Well, i guess it depends on the question you are asking. Its certainly not a sign of strength. Heres a look at our primetime schedule on the cspan networks. A House Financial Services subcommittee on thursday explored how the Federal Reserve attempts to Statement Economy is impacting other countries. Witnesses on a panel of economists told the subcommittee on Monetary Policy that the fed must move carefully as it winds down its quantitative easing program, tapering to quickly could cause major Financial Disruptions in developing nations. [inaudible conversations] committee will come to order. Without objection the chair is authorized to declare recess of the committee at any time. Chair now recognizes himself for five minutes for the purpose of an Opening Statement and i wont take all those five minutes, but i will simply open to say this is a continuing part of our series of hearings examining the fed at the 100th anniversary of the fed, of the Federal Reserve. And examining both the history of the fed and the current activities of the fed and what the future of the fed might look like. The title of this hearing is International Impacts of the Federal Reserves quantitative easing program. Qe, as we have lovingly come to know it, has been the subject of a number of hearings or discussions and hearings in this committee since it was begun several years ago. My opinion on qe in terms of its domestic policy has been clear. There are benefits, if you will, to qe, and there are clearly risks and negaives to qe. And in my estimation, the risks and negatives of qe are currently outweighing the benefits thereof, which call for its being wound down and eliminated him in my view. But clearly, the Federal Reserve Board Open Market Committee has not agreed with that assessment in the past, and we will see what they do in the future but a lot of those discussions have been based upon an evaluation of the domestic impacts of quantitative easing, of what its doing for the economy, for Interest Rates, for the money supply, those sorts of things. Thats not what this hearing is intended to examine. U. S. Monetary policy does not happen or exist in a vacuum. When the greatest nation on earth makes decisions and makes economic moves, or moves in the area of Monetary Policy, other nations react, and it affects International Markets and it affects international trade, it can affect the number of things. We have our distinguished panel here this morning in order to give us their views of what are the International Impacts of quantitative easing and thereby how do those the actions or reactions of what is going on in other countries impact than the u. S. And its another part of quantitative easing that we havent spent a lot of time on and that this hearing is intended to try and understand better as to what those International Impacts are that thereby have an impact on u. S. Domestically as well. So with that i believe okay. The gentleman is recognized for an Opening Statement, five minutes. Thank you, mr. Chairman. Dont have any formal Opening Statement. I just want to thank the witnesses for the presence. Obviously, this is a really important issue. We both represent the state of michigan and what those interested in your observations relative to this policy and its effect on employment. I appreciate your attendance. I yield my time back. The gentleman yield back. The other gentleman from michigan bashing i just realized, im surrounded by michiganders spent you get three of us up here. The other children from michigan is recognized for five minutes. Thank you, mr. Chairman. For the record i believe the Federal Reserve open committee ought to listen to you more often as well, so just to get that out of the way. It is interesting in this 100 the year, going back and doing some research, i love history, love doing things on that and you look at the creation of the fed and why this came about, some of those Economic Crises in the early 20th century, you know, having the fed founded as an independent agency, deriving its power from congress. Weve seen a certain amount of expansion over the past 100 years, and thats been quite significant expansion, and looking at that as it was originally created, supervised and monitoring Banking Systems here in the United States, it seemed to grow unchecked. And i know that nature in government abhor vacuums, and they will fill them one way or the other. But, you know, we are seeing them being in really a lender of last resort for Banking Institutions that require additional credit to stay afloat, whether that has impact on whats happening internationally. But given the interconnectedness of the Global Financial system, theres no doubt that their policies have Significant Impact of International Markets and foreign economies. With the limitation of artificial near zero Interest Rates, with qe one, two, three, operation twist, that it has made an interesting that the domestic economy by using unprecedented level of interventionist policies. Im curious to get your input as to what you believe that this experiment has caused as weve seen investors really make different decisions, and weve seen eyesight statistic this morning that the top 1 have seen i believe it was a 31 increase in their wealth over the last few years, and for the lower tiers of the economy, its been fractions of a percent. And i think the key to all of this, income questions that were dealing with, distribution, quality of opportunity commercially about Economic Activity. More than anything. I think we have a common goal. The question is how is it really being handled. These emerging market economies will cause several foreign currencies to rise in value. However rumors, it was interesting just seen the rumors in mid2013 that the Federal Reserve would begin tapering its purchases of government securities earlier than expected. Investors begin to react very quickly. They are not static. They are very dynamic when theyre making those decisions. Theyre selling off their stakes in foreign currencies across the goal. We have an impact. What we learned today shouldnt only inform our understanding of whats happening here domestically but increasingly are global and complex Macro Economy that we have here. And i appreciate your time today, gentlemen, and giving us some insight as to take to whats been happening as we see this 100th anniversary milestone. With that, mr. Chairman, i yield back. Thank you. Gentleman yield back. Again, thank you all for being here. So now well move to the people who know more about this in all of us put together. We will start with doctor benn steil, director of International Economics at the council on foreign relations. He has previously served as a nonexistent rector of the Security Exchange was now part of the Swiss Exchange and former directed the International Economics program at the Royal Institute of International Affairs in london. Dr. Steil, welcome. Thank you and your recognized five minute. Thank you, mr. Chairman. Can you make sure we turn on your mic and boulder close. Pull it a little closer so we can hear you better. How is that . Better, thank you. Since the financial crisis in 2008, actions taken by the Federal Reserve to increase liquidity in u. S. Financial system have had a major impact outside the borders of the United States. Quantitative easing, through which the fed increases the Monetary Base by buying longerterm Financial Assets with newly conjured dollars, thereby pushing down their yield, was undertaken partly to encourage and, indeed, has encouraged investors to shift resources into riskier assets. The holy unintended by the fed, however, this shift has encompassed issues in emerging Market Countries. Anticipation of the feds withdrawal from qe3, though it will only begin with a modest tapering of purchases this month, has already had a substantial impact on the currency and bond markets of a number of important emerging market economies. The hardest hit countries have been those running large current account deficits. In particular, india, indonesia, turkey and brazil. Economic growth in these countries and investment returns coming with it, relying as they have it on shortterm capital flows abroad, have always been the most at risk of a change in the trajectory of fed policy from accommodation to tightening. Suck in emerging markets protect themselves in advance of a tightening of fed policy . A recent imf study found that countries with a lower share of Foreign Ownership of domestic assets, trade surplus and large Foreign Exchange reserves have been more resilient. This has policy implications. In good times developing countries should apply a firm hand to keep their imports and currency down, and their exports and dollar reserves up. Unfortunately, such policies are apt to constitute what many observers in this country would call currency manipulation. Economist Jared Bernstein and dean baker recently called for the United States to impose taxes on Foreign Holdings of treasuries and terrace on imports precisely to counteract them. This is, in my view, a misguided recipe for raising global trade tensions and political conflict. But the very fact that prominent commentators are calling for such action illustrates the importance of considering how the functioning or malfunction of the global Monetary System can encourage a spiral of damaging policy actions. Chinas agreement with brazil, russia, turkey and japan to move away from dollarbased trades, for example, have the potential to undermine the multilateral trading system as countries that dont want to stockpile each others currencies will use tray discriminations to prevent trade imbalance is from emerging. So what can be done . International cooperation can help of the margins by mitigating shortterm liquidity problems, most notably through currency swap arrangements. The fed extended swap lines to brazil, mexico and south korea in october of 2008, although these arrangements were allowed to aspire in 2010. Regarding Federal Reserve Monetary Policy actions, anything that makes them more predictable will, all else being equal, attenuate market volatility globally. Over the past 15 months the fed has tried to do this through the formal use of socalled Forward Guidance. Initially this is implemented through the setting of databased markers for the raising of Interest Rates targets. These were quickly abandoned, however, in favor of databased markers for both the raising of Interest Rates targets and the tapering of monthly asset purchases. Both approaches are challenging to carry out in practice. Database to guidance is problematic in that date markers are ultimately justified by the feds expect agents of Economic Conditions years into the future, and as ive documented elsewhere, the feds forecasting record over the past quartercentury has been poor. Database guidance can also create rather than reduce market turbulence when the data markers themselves are volatile. Such as Monthly Employment figures. Asset purchases in particular are not a precision tool, so trying to calibrate them continuously to volatile Economic Data is fraught with difficulty. It is worth recalling that chairman bernanke had in june suggested that asset purchases would end with the Unemployment Rate at around 7 . In fact, tapering is only now just starting with unemployment at this level. Assuming the fed had good reason to abandon the chairmans june guidance, it wouldve been advisable not to issued in first place. In short, rules, targets and Forward Guidance for u. S. Monetary policy action were not significantly mitigate the challenges that emerging markets will face Going Forward in adapting to market perturbatio perturbations. Broadly speaking the inevitable inconsistencies that will open up between the feds rules, targets and guidance on the one hand, and unexpected Economic Developers on the other will lead either to inappropriate policy stances or a falling away of the credit of such rules, targets and guidance as they are abandoned or amended. It is therefore in our National Interest except openly that emerging market governments be able to element prudent controls on shortterm portfolio inflows in order to shield their economies from sudden extreme and unpredictable shocks. Some of which may be triggered by the provisions of her own Federal Reserve taken in good faith pursuit of the mandates a sign to it by congress. Chile which has been a model of prudent Macro Economic management over many years used modest one year im remunerated reserve requirements on capital inflows with some apparent success during the crisis marked 1990s. And of course dr. Meltzers main claim to fame as he shares a degree from which i graduated from companies ela. He has a doctorate, i have a ea, insignificant difference. Thank you for being here. You are recognized for five minutes. It is always a pleasure to be here. I thank you as members of the committee for inviting me. If you can pull to transcend a little closer. I am going to talk about what i think its lost all the time in these discussions is how do we get back to longterm stability . That is what the major object it should be, to find a way that would take us back to longterm stability. Central banks have two major monetary responsibilities. Domestic and international. Most Central Banks ignore the International Responsibility and achieve domestic price stability as they do it at all by acting unilaterally. Having made that choice, international stability, enhanced ability to change rates and capital in the requires some form of collective agreement. I have long advocated a program that achieves domestic stability and increases Exchange Rate stability. My proposal does not require International Conference is, for an intervention in domestic policy or in person at the international supervisors. It is entirely voluntarily voluntary. As much as the International Gold standard was enforced by markets. It has a few simple rules. The United States, the European Central bank, the bank of japan and china and exchange controls, the bank of china agreed to maintain domestic inflation between zero and 2 a year. Second, any other country that chooses to enforce low inflation and maintain a fixed Exchange Rate can pay in its own choice to one of the major currencies. They gave him the benefit, price and Exchange Rate stability that no country can achieve acting alone. The country that chooses this policy is responsible for maintaining its Exchange Rate. Third, the major countries benefit by exchanging stability with all currencies. The major currencies float to changes that possibly taste. Fourth, no country is required to join the system. They remain voluntary. The public system gives an incentive to join. Fifth, the system would introduce discipline that has been lacking for the break down of the Bretton Woods system. Like the old International Gold standard, markets who do the enforcement. The patch with an large budget deficits and markets devalue the currency and increase expected inflation, forcing the country to a just. Sixth, countries could suspend operational systems as they did under the gold standard. Not permitting temporary suspension is a major flaw of the european monetary arrangements that prolongs forever perhaps craziest. I do not claim this proposal would achieve some ideal result. I do not believe that its possible for modern democratic government. It offers improvement of increased stability. An idl like zero stability is not achievable in the third world. If adopted, my proposal would limit the damage that governments do, particularly the damage the Federal Reserve system does. The current example is excessive expansion of Bank Reserves that spilled over to other countries. Some, like japan, respond by depreciating currency. Others experience the nonwarranted inflation. Still, others, turkey for example had difficulty adjusting. The amount of problem that has occurred is small so far because the amount of reserves that the fed has produced are almost entirely idle reserves. More than 95 of qe2 and kiwi three have the first round of expansion and then our idle and help at the banks. The question to which i do not find a sensible answer if you ask with 2. 5 trillion is sitting on idle on banks Balance Sheets and 2 trillion sitting idle on corporate Balance Sheets, white in the name of goodness can the Federal Reserve do that the banks and corporations do by themselves. I make two additional governments do not limit damage or prevented. Two additional proposals have little reason for the world of economic capital flows of the magnitude three experience and i put potential Monetary Fund lending because the international Monetary Fund lends to countries which will have extreme difficulty like the ukraine, romania and back those loans. Repay a substantial part of those loans. We should put some restrictions. Thank you. Thank you, dr. Meltzer. Dr. Dennis lachemann is a relative hello at the American Enterprise institute. He served as director policy Development Review at the aforementioned ins. He worked at managing director and chief emerging market economic strategist at Salomon Smith arnie and he has taught at georgetown and Johns Hopkins universities. Welcome, dr. Lachemann. You are recognized for five minutes. Thank you, mr. Chairman. Thank you for inviting me to testify before this committee this morning. Let me start by saying that u. S. Monetary policy typically has significance effects on the list of the world. It does so through the rate that affects the state of the u. S. Domestic economy as well as the manner which in us as capital flows from the United States to the rest of the world. Be an usually large to brief u. S. Monetary policy has been no exception to the rule. Indeed, theres every reason to believe that the very large scale and form of the most recent episode of u. S. Monetary policy ezine has not worked in the usual degree to the rest of the World Economy. Since end to decimate, and decimate, and the massive easing of Monetary Policy by the Federal Reserve and other Central Banks of countries has resulted in substantial capital flows into the emerging market. According to International Monetary estimates, Foreign Investments converge the bonds has risen by a cumulative 1. 1 trillion through 2013 and this has cemented as much as 2 of the recipient countrys gross mistake products. These capital flows have compromised their economic fundamentals of the number of key emerging Market Countries by undermining market discipline and in many cases results in access current appreciation. In particular, emerging market for an rates have been reduced to levels that would be justified for this countrys economic fundamentals. In a number of notable cases, including indonesia, india, south africa and turkey, each financing has led to the experiment of muchneeded structure with arms and budget adjustment. Its also lead to excessive credit expansion into the buildup of financial leverage, making these countries vulnerable to any sudden stop in capital flows. Ive even greater concern for the Global Economic outlook in the emerging market is the complacency presently characterizing european policymakers can turn a european suffering that christ is. Lower costs in europe, which has been facilitated in large part better reserve ezine ive allowed european policymakers into a false sense of security. This will substantially reduce the impetus for muchneeded policy to form and adjustment to European Economic periphery and to delay europes move towards thinking of fiscal union, which would be necessary for the euro. In determining the pace at which an unwinding of connotative easing program would need to be mindful of his policies. This would particularly appear to be the case given a large impact of expansion of reserves has had on the economic fundamentals of a number of key emerging market economies anonymous countries in the European Economic periphery. In recent years, the emerging market economies have accounted for more than half of World Economic growth, which means any slowing in this economies could have a material bearing on the u. S. Economic outlook. The key challenge for the Federal Reserve will be to find the right balance at a pace which stands for qualitative easing. Slower pace to the undermining of market participate in economies and in the euro zone. At the same time, it runs the risk of a sudden stop in capital flows to the emerging market economies in europe, which could be disruptive to the Global Economy. An indication of the Downside Risk to the Global Economy that could be opposed by quantitative easing was provided by the emerging market asset of chairman Ben Bernankes information made that the fed had an unwinding of his third round of quantitative easing. And the six months following, the bonds of the emerging Market Countries experienced high rates of critics reaction and had wide external current account deficit, including notably india, indonesia, south africa and turkey all came under considerable pressure. It is for us to countries to tighten the macroeconomic policies, which has resulted in a slowing of Economic Growth in its first the imf to downgrade its Economic Growth outlook. Thank you, mr. Chairman. Thank you, dr. Lachman. That dirt arvin subramanian, who told me before the hearing here that people just call him superman. I may just we can all just call him dr. Superman if you have trouble with dr. Superman and purity as a fellow at the institute for International Economics, a senior fellow for Global Development and has been associate director for research of the aforementioned ins, international Monetary Fund and staff on tariffs and trade. Welcome, dr. Superman. If you are recognized for five minutes. Pull that closer again. That way we a little closer still. Is it on . Sorry. At a significantly better. I want to use this opportunity to look back in order to look forward. In particular, i want to look back over these last two years to draw policy lesson for the broader vital issue of american Global Economic leadership. Thats one fewer nonamericans testifying before you. Such a bad end, i want to offer perhaps too, may may be too enough policy suggestions. The reflection number one. As the Worlds Largest economy, its financial epicenter in the issue of the perm reserve currency, actions by the fed will unavoidably affect other countries by trade and Exchange Rates, capital flows and overall financial conditions. That is unavoidable. Reflection number two. Qed has affected emerging markets in the Global Economy. To be sure, in some instances, theyve added pressures, complicating macro management. But the broad impact has depended on what the Global Situation is on the situation in individual countries. Let me give two examples. Qe one was positive because it saves the World Economy from collapse. So that is good for the u. S. And good for the World Economy. Second example. Take qe3 that chairman bernanke has taken last year. Many districts saw this problem, as my colleague noted, but pressures were not uniformed and were seen acutely in some countries is vulnerable more than others. To layout the blame on the fed is to forget that being exposed to u. S. Policy as part of the deal of financial globalization that emerging market as consenting adults have voluntarily not done. They are less financially globalized like china, all Major Economies more resilient i adapt to better policies. I am hindu and not christian, but let me above scripture. That being said, leads to reflection number two. The fed has brought even mindful International Responsibilities and quietly, but effectively has shown remarkable International Economic leadership. It provided dollar swap wives to Central Banks and provided the emerging markets. Its provided liquidity to europe in the bank of japan. These actions did contribute to common conditions in deep crisis in these years. There is something remarkable that needs to be noted here, mr. Chairman. These emerging markets during the crisis chose not to go through the imf, even though the imf crisis was seen as an instrument of american hegemony. It shows to come straight to the u. S. Point number two is remarkable because when the fed cut the swap lines, at that time the rest of the u. S. Government was a bystander because of its own conscience, able to enter counsel to these economies in crisis. In some ways, what i want to say this in some ways the fed has been very constructive global role. The question is what can the rest of the u. S. Government and the subcommittee in particular can do by Global Economic leadership. That leads me to policy recommendation number one. Mr. Chairman, youre close to this. The u. S. Congress should go with the administration to ensure necessary legislation to out at the imf resources to the food the omni s. Appropriations bill. Why do i say that . In relation to crises, i think that job should not be that of the fed. They should be that of the imf. Congressional passage of ims legislation would be relatively cheap. It would protect the u. S. In the world against crises and above all, in some ways is exclusively taking on bio spread. To me, they said he a side note u. S. Economic leadership and its upward for me to say this, but the u. S. Is the only major country that stands in the way of this legislation. Which leads me to policy recommendation number two. Chairman come you talked about the feedback of qed policy back on the system. Whether u. S. Bilateral investment of freetrade negotiations limit the ability of countries to deal up financial interest. The negotiations of the tpp offer excellent clarifying that the u. S. Does not gain to circumscribed or eliminate policy instruments by its trading partners. For example, prudential controls and broader controls on balance payment grounds to respond to the pressure from financial globalization and crises. This would also be consistent with the imf on capital controls. By half recommendation ive argued in my testimony that qe has not led to the emerging market country. In fact, the year of qe has coincided with Foreign Exchange intervention and imbalances. In fact, independently of qe, currency manipulation is a problem for the world system because it is a trade distortion. However, i see the best way to address it is to multilaterally world trade organization. An alternative would be to address it in the tpp. This should be done carefully making sure the issue is not captured by a few constituencies in the u. S. And derail the prospects of broader liberalization under the tpp. Thank you, mr. Chairman. Thank you, dr. Subramanian. The chair recognizes himself for five minutes. Thank you all for your testimony. Okay, i think i heard a resounding agreement at least that qe does have an impact. Qe in the u. S. Has an impact on foreign market and on the International Economy generally. I heard from a bunch of you things that currency manipulation, trade barriers, capital flows, all kinds of Different Things like that. What i want to try and do and dr. Subramanian has a different view to the efficacy of the impact you do. I want to have you respond to each others points if you will. If we make it out of first grade level, rather than all of the economic speak, lets try and say, what is the impact . What is the basic fundamental impact . Either dr. Steil, meltzer or someone, anyone who does not agree with dr. Subramanian that it is positive. Dr. Lachman, you look like youre ready for your button. Gives me the greatest negative impact of qe on International Economics and refute if you believe you can, dr. Subramanians point. I guess if youre looking internationally, what it is really wanting to do is distinguish between the short run impact in the longer run impact. So while the short run impact might be beneficial as the capital is flowing into these countries, it lowers Interest Rates, whose growth and all that mess. But it does is produces market discipline and allow these countries to establish imbalances. So when the music stops, when the process is unwound, those countries are extremely vulnerable to the slowing of the capital. So what i am saying is that the capital flows and come in drives growth up. Everything is okay. But it increases vulnerabilities. What we will see now and what we are seeing right now is the Key Countries known as the fragile five are experiencing difficulties as the capitalist reform because they allow currencies to get overvalued and that got very large imbalances. So that is really the adverse cost. The cost of qe is not seen immediately. Its rather seen when the process is unwound and that is yet to be seen. What is the risk to the United States from those vulnerabilities . Well, the risk to the United States are rather large as weve seen in previous crises. The asian crises coffer example, 1998. Both in terms of you got this economy slowing. It means you are not at state. Export its head. The greater risk is to the Global Financial system, that if these countries run into any kind of payment difficulties, that can cause difficulty on the Banking System. I am not concerned so much about that in terms of the asian countries, but im certainly concerned about that in terms of the European Economic periphery. And what are the fragile five . Resort, indonesia, south africa and turkey. These fragile five are fairly sizable economies. You got to think of brazil and in yet as two 22 of the bricks and these economies have been accounting for most of Global Growth over the last 10 years. Dr. Subramanian, your response. Is, mr. Chairman, the point is there is a shortterm and longterm impact. The two key points. One is that the capital inflows that go to developing countries because of qe are very set on these countries depend very much if they do things right. Its a huge benefit. Similarly, if they follow sound economic policies in the capital flows out, the risks are minimal. And therefore, the key point here, one example of this is the impact is in fact buried. When the capital started moving out, the fragile five were affected, but they were affected because of india, my own country, for example, was one of the worst hit because its highly inefficient. Fiscal deficits of 10 . China, singapore, south korea to a less effect. My time has expired. Thank you for the opportunity. I will now recognize the gentleman from illinois, mr. Foster, for five minutes. Thank you offered. On this complicated subject. After i had been enforced vacation a couple years ago, i spent a while down the is not our economic model and getting frustrated by the difficulty of the multicountry models and parameters who have to deal with. As a physicist, i turn there might be an actual analysis, but i dont think we are anywhere near that pure in a recent speech, ben bernanke talked about using Mortgage Loan to value as an economic tool because one of the themes that are coming out here is the fact that actions by the Federal Reserve amplified lepper cycles in developing countries. And so, one of the lessons for biology, if you want a stable system, you need a number of distributed feed that loops. So each country independently would insulate itself. As many countries have a hand, when they see a bubble, they turn out. For example, mortgage underwriting requirements to cool down the real estate markets. This is also something that could be unwound when the fed unwinds its own policies. I was wondering if you have any comments on the concept that individual economies can do a lot to insulate themselves from fed policy. I inked the data bear that out very strongly that countries can do things to insulate themselves from the impact of Federal Reserve policy. It has been pointed out that the effect of the qe on current emerging markets has not been uniform. The countries never hit the hardest, countries like india, indonesia, brazil and turkey have certain features. Very large current account deficits. Singapore, china, south korea did not have such deficits and also tended to have very large Foreign Exchange reserves. My concern is this. If you try to extract policy lessons from this experience, they should be a little bit disturbing to us. Because if everybody in the emerging market world behaves like south korea, global imbalances are only going to get much worse. The lesson weve talked these emerging markets is that in good times they should apply a firm hand to keep their import currencies down and their exports and Foreign Exchange reserves up. As i have sized in my testimony, broadly speaking, that is what many observers in this country refer to its current the manipulation. Not all countries can run simultaneously. Thats right. Often as you know, mr. Foster, we wind up being the market of last resort for countries around the world that are insistent on pursuing policies that result in current account surpluses. I am concerned that the experience of quantitative easing in the emerging market world will lead to the adoption of policies that will increase global trade tensions rather than reduce them. Okay. Other comments . I like the way you organize thinking about this problem. I want to add a dimension that has not been here. We have seen 98 of qe2, qe3 go into idol reserves. There is a tidal wave therapy at we dont know how it is going to break. What we are describing so far is the effect of a small amount of the qe spilling over into the rest of the world. What is going to happen when the other 95 comes out . Is it going to come out in an orderly way . Is it going to come out in a bag . Is it going to create havoc to the rest of the world. I dont think anybody can say anything about that. Those are the risks involved here. We can talk about them as countries can do. If we have a tidal wave of this money coming out, 2. 5 trillion in idol reserves, or more, growing into trillion dollars in corporate Balance Sheets. Thats a lot of money. It can create a lot of problems. We may be fortunate. We may not. The idea that the United States will buffer those problems is wrong. We did that because we had a huge important access because of energy. Thats going away. The world of the future is going to be we could wrap up. We will now move to michigan of the next two questioners. First for the vice chairman of the committee, recognized for five minutes. Thank you. I feel like i am honestly drinking the adulteries are drinking out of a firehose. Im trying to drink out of for a phd fire hoses coming out of. I appreciate your patience. Dr. Subramanian is indicating the good book to be his brothers keeper. I am hearing various views on that. I am concerned a bit. Everyone should be on every country insulating itself. There is a tremendous amount of criticism of the tpp coming out of the Automotive Industry when we are talking about japan. Maybe cnn should not click here if we are starting to dial back. We have at a policy. How in the world can we be critical of any other countries that are going to be taking the same defensive actions that we have taken. I am not a phd. It did take some courses in economics and concentration. One of the first laws of economics i ever learned about was the law of diminishing returns. It seems to me as we are going from qe1 to qe3, various, as dr. Meltzer is pointing out the huge massive buildup in the Banking System here. Are we really getting golden object is . If you could address those two things. I think as dr. Lachman has pointed out and what is going to be the effects of this reserves that have been built up . Dr. Meltzer, go ahead. I like the brothers keeper. The brothers dont necessarily want to keeper. Im probably not going to want that. Ive had the experience of the secretary of the treasury going over to europe and telling them they need to do fiscal expansion. They laugh at them. That is they take care of your problems. Dont try to tell us how to take hours. When the United States had much better policies, it could give advice. Its a very poor position to give advice these days for fiscal Monetary Policy. I would like to make a slightly different short point. I am concerned about the problem that congress has been performing its oversight duties. The only way i believe you could perform oversight duties effectively is to have a role that required the Federal Reserve and if they dont follow it, you have a question. It is just not possible for members of the committee, however diligent they may be, to calm and tangle with the chairman of the Federal Reserve. Dr. Meltzer, you brought the rollout previously. Are we in danger of the world has seen or worse yet, not even believing what we are saying, what we are doing or saying we are going to be doing if we are not tapering what we said we would favor . Dr. Subramanian, quickly address that. Let me suggest the first questions, how we can be critical of others when we are doing the same thing. It is important to remember that this tidal wave that has gone out is not titled when compared to what happened before qe. A lot, in fact the majority of the flows to emerging markets have happened because theyve grown much faster than the u. S. So for investors, it is much more attractive to invest in those countries than 2 or 0 in the United States. Id love to talk about regulatory reform. Hus qe policies for large financial collapse. The impact on the u. S. Exchange rate has been relatively in the aftermath of the crisis. And i think one should have u. S. Three. Isnt it fair to say it has expired . The gentlemans time has expired. Perhaps the other older he is a question. Go against kansas city. I am a spartan right now. Okay. Thank you. Sticking with the michigan team, i would like to take the conversation sort of down to a mainstream local economic level from my point of view. I represent flint, michigan. A lot of district i represent is part of an Old Industrial corridor and has struggled mightily in making the transition to the new economy. Michigan unemployment stands at 8. 8 , second or third highest in the country. It has been a condition we have struggled with mightily. The question that i have, if dr. Subramanian would respond and perhaps others might comment as Many Americans continue to struggle with unemployment, given the feds mandate, even yet congress has failed to extend emergency unemployment and a face that could effect is effect in 1. 3 million, to go up to 3 million people. Sometime in march. Of course, the effect on many stays is disproportionate, mice a particularly. I am just curious if you would comment because it seems the feds use the qe has been critical to help the economy recover and put people back to work. In the context of that policy, you talk about ways the qe could balance our domestic obligations to grow the economy and create jobs. Its absolutely critical in my district another part date was still that cannot aspects of policies on emerging markets have a fed increases. Its a great question. As you said, the u. S. Economy and it is certainly responsible provide a very vital policies of the economies. Now, is not advice to the view at the expense of other countries. As i said, other countries have policy instruments. By providing this liquidity of two countries in trouble. Brazil, mexico, singapore and south korea came to the u. S. Forecast and that has calm conditions. I take this one step forward and say the way to reconcile the responsibilities would be for the fed to do what it needs to do for the u. S. Economy. But for the rest of the u. S. Government, to ensure other things can be done for economies. I come back with the best that congress can do now is in fact support the future of terror crises, which it is true would come back to the u. S. The way to address that is to fund the imf and provide the resources to do with international crises. Any other dr. Lachman. Let me comment on that. Sorry. Either one. You may want to explain to your constituents, whites in the interest of the United States for the United States to finance the ims. Especially to france, which refuses to make serious adjustment in its been, why thats a good policy for the United States. Why dont we just say to the french, look, you have a serious problem. You have to deal with it. Its not our problem. Its your problem. Why should the United States be landing to the ukraine, to the imf. Why should we do that . Why should the United States be lending money, and ill stop there, to a rant, to imf. It is not missing anything we could call you as policy. If one is talking about imf, eightpoint that is really very important to bear in mind is that most of the imf monday that the last two years has entered the European Countries. 70 or 80 of their lending. As to does the imf need the amount of money we thought they needed two or three years ago when youve got the ecb that is able to take care of most of the European Countries class gentlemen, time is expired. We will move from wolverines to hoosiers. The gentleman from indiana is recognized for five minutes. Thank you, mr. Chairman. I cant rack about any big Football Games the past couple of weeks. Anyway, thank you you i appreciate the testimony. This has been a fascinating discussion and one the United States plays a huge role in the Global Economy. I appreciate, dr. Benn your comment. Thats a lot of common sense when he said in good times developing countries should apply a firm hand to keep their import occurred he downed an expert in dollar reserves. Unfortunately, not many follow the advice. Could you comment on many of us in congress have been critical of capital controls and the other restrictions. Experts have suggested using terrorists and other countervailing measures to shelter u. S. Firms from their effects. Doesnt miss go to the bottom are occurring you are morphing into potential trade war. Dr. Steil, can you comment on that . Feedback regard to the use of capital control click yes. Which is are very used of capital control is a domestic crisis when the government take actions that are targeted. For example, certain firms, certain investors to prevent repatriation of capitals. The schools have been clearly laid out in advance. They must not be arbitrary and directed at specific individuals or firms or interests. They must have general applicability. As i emphasized at the end of my clearly laid down in the dance as a means of ensuring that they dont come after observing such inflows have to face the problem of arbitrary restriction in order to stop the outcomes. I use an example of a country that did in fact use such modest restrictions very prudently in the 1990s and appears to have done so quite successfully. Is there any country today you would point to that is done something similar to the 90s . Is there anyone . Not exactly the same, but the inflows from abroad. The difference between brazil and chile is chile implemented this policy during the good times. Not arbitrarily in order to prevent an imminent crisis from unfurling. Brazil has been much more reactionary and that is the problem there. Thank you. Dr. Meltzer come if you could comment a little bit. You mentioned longterm stability. That is what we are all looking for. But you also mentioned, ill go back to your testimony, in a couple of different places regarding International Gold standard. You mentioned that in point number five. Like the old International Gold standard. Could you touch on that a little bit more . Should we look back at the ways be used to do things and maybe reconsider how we do support our currencies. Thank you. Way back in the 1970s, i used to dictate to choose occasionally what a former member this committee. Usually ended up by saying to him, the reason we dont have the goals and it is not because we dont know about the gold standard. It is because we do. We like to get the benefits without getting the cost of the gold standard. The cost of the goals of your attention on what the constituents would really want. Its going to give priority to maintaining the Exchange Rate. Thats not what they want. They want the prayer is maintaining conditions at home. So i tried to come up with a system that said, lets try to get the gold standard, which was market enforcement, meetings of central bankers, but markets deciding whether you are doing the right and were not, that sort of thing. The public good which is that the laws, which is to have countries to the benefits of price stability, which is an Exchange Rate stability to the extent possible. Thats the idea. Thank you. I would love to have a longer conversation with you about that. I yield back. The time is expired. We now move to the gentleman from delaware, mr. Kearney, for five minutes. One Ali University of Delaware Team was the fighting blue pants. You go from the hoosiers to the fighting blue hens over here. Im so pleased you have filled that bit of ignorance. You try to simplify at a few bucks to the world through biological systems, which didnt help me at all. I what kind of like to go back about it to have you comment, may be on the first grade level at the chair requested, the kind of on the basic level that i can try to communicate with my constituent to just answer the basic question of why does it matter . Why does it matter to the people in my state of delaware is really the first question. Dr. Meltzer, you can kind of touch on that. One of the major problems is we dont have it and we have a habit. Weve had a lot of ups and downs. In the history of the fed to go there, and the hundred years, the best. Comment the only long. Of relative stability with good growth, low inflation, short math assessment, which is something called the rule that is now, why did that work well . Unlike most of what they do, the amos on a longerterm object is. They crowded and pushed by the markets, by the congress, perhaps by economists to do things, which are mostly short run in nature. Ill give you an example. My constituents obviously are focused more on the Unemployment Rate in the state, which in delaware is a little bit other than the rest of the country. They are so focused on that as opposed to what the fed is doing with qe1, qe2 or qe3. The bulk of the feedback i get. I will quote paul volcker, who this committee certainly remembers. Mr. Volcker said the way to get low unemployment was to have low expected inflation. That is depend upon the markets. Dont try to get the employment breakdown by raising the inflation rate and then trying to get the inflation rate down by raising the Unemployment Rate. That just gives you a lot of noise. So what volcker said was what i would call the antiphillips curve approach. Get the expected inflation rate down and hanker it down as best you can. And then the marks will provide jobs and prosperity. Dr. Subramanian. The great question is why it matters. The way i would take about it is to say if we do something in the u. S. That affects other countries, that can come back to haunt us because they buy less services for mass. Or the place of delaware, they may say we dont want Foreign Financial Service Providers to make country because they try and provide impulse capital controls. That is going to hurt delaware. That is the reason one has to impress upon her constituents that what we do we have to make sure it doesnt negatively impact another because they can come back in a globalized interconnected world. One last quick question. Ive got about a minute left. We are talking about International Impacts here with respect to fed policy. What if congress did not raise the debt ceiling . What should we be concerned about their . Dr. Meltzer, would you like to . That is not a sensible policy. You have to raise the debt ceiling. I agree with those who say you incur the responsibilities. You dont want to concentrate on raising or not raising the dead dealing. You want to concentrate on a longerterm policy, which says we wont have to pay the debt ceiling again. In the future, next year or the year after. That is an effective policy. That is something you can do. And a sense of about the negative impacts might be if that happens . Yeah, the u. S. Debt is highly risky. I mean, it is highly risky would endanger the position of having to reserve currency . Yes. Maybe another time we can have a conversation about what impact that would have. My time is up. Thanks very much. Thank you. Gentlemans time has expired. I have waited in the battle between gamecock and tigers before so i wont do it. I love recognized i want to touch on what is related, but a little bit different topic. We have dr. Bernanke, before this committee, but a Different Committee i was on to explain to us at that time, not a new policy, the something the fed was expanding at the time called u. S. Dollar liquidity swaps, and at the rate the fed policy involves other countries, other Central Banks. It was a temporary program from its inception. And then i think in late october this year, without much fanfare was made permanent in the facility is not a permanent facility between the Federal Reserve in three or four other systems. The bank explained why it was doing that. The banks wanted to bring stability in a known quantity or known facility into play. Panders to them that heres my question to you. Should we be concerned about this . It got very little attention when they initially put the temporary program into place in 2007 and extended again in 2010. The fed chairman came to a committee to tell us about it. When a cop urbanite, got very little press. Only one commentator i could find to raise the red flag. The point i want to make before it began to is. Absolutely. We are effectively getting collateral for these swaps that are not going to collapse invaluable in night. I want to emphasize that we only made these facilities permanent with five of the most credible Central Banks in the world. Japan and canada and european swiss Central Banks. I think its important that we make it permanent, because in a crisis, when developed markets are struggling to ensure dollar liquidity, you can have a contagion effect where for example u. S. Banks are reluctant to deal with the european banks exist they think that they would have a shortage of dollar liquidity so i think its very important that the developed Central Banks in the world do cooperate. Is that the consensus . I would go one step further. This has been one of the resounding successes of policy not just in europe but also after the lehman crisis as i said. And merging markets wouldnt go to the imf but came through the fed because we needed that liquidity. 2, now these swaps are twoway swaps. It can happen both ways. Its not just an its technically important to note but what i think the third and most important point is that because of the success of this policy, many commentators now are saying this and that should be generalized and in fact the imf should become the coordinator of these facilities more broadly because it has had such a positive impact and i think that shows the fed has played a very important leadership role in this regard reads the okay and that concerns me just a little bit because that would effectively reduce competition i would think that for the various countries and dr. Nelson do you want to check in on this . We started this policy way back in 62 and it lasted until sometime in the 80s and then its been reinitiated. It was generally speaking a twoway policy, mostly we land to others but on occasion they lent to us. It did good, and not much harm. I dont have any particular concern about it. Thank you. I had another question but i only have 20 seconds left so i yield back. The gentleman yields back. The gentleman from North Carolina mr. Pittenger is recognized for five minutes. Thank you mr. Chairman and thank you gentlemen for your service and your input today. Dr. Meltzer i very much appreciate your views regarding the longterm stability of the markets and the economys and that needs to be the focus for us as far solutions but what i would say is chair of the International Financial institution Advisory Commission you have taken a hard look and an indepth look at the International Financial system. In essence i guess i would like to have just more analysis from that understanding of your view of the World Economy by the u. S. Dollars and how that impacts the world economies and is well what happens when the Federal Reserve needs to unwind this Balance Sheet . Well, thats a tall order serve. You can handle it. Let me just say to be brief, i think the danger that i see that we could have a very rough time in the future, because we have so much liquidity in the system and we dont know where its going to go warp when its going to go or if it is going to go. We just dont know and thats a huge uncertainty hanging over the system. We need to reign that in. As i said before, we have qe with 2. 5 trillion on the feds Balance Sheet on the banks Balance Sheet and 2 trillion on the corporate Balance Sheet or more. What can adding more liquidity to . Nothing that the banks and the others cant do by themselves. So the best thing we could do would be and qe now and come up, have the fed come in with a detailed clear plan of howell overtime they are going to reduce that 2. 5 trillion. One of the most foolish things that i have seen happen is to say we are going to tie the end of qe to the current unemployment. First thats a noisy number and second he gets revised substantially as you know. Second, it came down mainly because people dropped out of the labor force. Thats bad and not good because we are losing a lot of skilled labor. So why is that a reason why you want to do or not to qe . What you need is to say look this is a problem thats going to take years to solve so what we need is a conditional strategy and they should come in here and tell you, this is how we plan to do it and this is the conditional strategy we have thats going to last over the next three or four years. Thank you. Do any of the rest of you want to comment on this . I think you are looking at the unwinding of qe and you ought to look at whats the impact going to be on longterm bond yields and basically what we have seen during the period of qe is longterm Interest Rates in the United States were brought down to the lowest level that they have been in the postwar period. We were down 1. 6 on 10 year bonds. As the fed unwinds, the expectation is that those will rise. We are already at 10 year yields and that will have a huge impact on capitol flows back to the United States and that is what puts pressure on the rest of the world in these emerging markets that didnt use the good times to strengthen their buffers so when the money comes back to the United States you would expect to see disruption and a number of key emerging economies. Two very brief points. With regard to the unwinding of qe i am very concerned about the composition of the feds Balance Sheet much more than i am with the size of it particularly the 1. 5 trillion in mortgagebacked securities. Chairman bernanke has made clear that he doesnt wish to sell these securities so he is going to have to use unconventional means of tightening policy when the time comes. Among the tools that he is mentioned our term Deposit Options and these have been used in europe and they have been used unsuccessfully. We have many failed auctions. The second concern i have is that the fed has been sending conflicting messages through its Forward Guidance about when it intends to tighten policy. In november 2012 it laid out a date marker. It said that it wouldnt intend to tighten policy in raise Interest Rates until the middle of 2015. One month later it changed that guidance and said that we use a database marker. It said it wouldnt do so until the Unemployment Rate hit 6. 5 . It said those two policies were consistent at the time but they are now inconsistent because the fed is expecting unemployment at 6. 5 this year. The market is hanging on the feds original guidance and believe the tightening is not going to come until the middle of 2015 so theres a potential train wreck here. Thank you gentleman. The gentlemans time has expired. The gentleman from new mexico mr. Pierces wreck in ice for five minutes and following that with the panels indulgence we will do a quick second round of questions. Mr. Pierce is recognized for five minutes. Thank you mr. Chairman. I appreciate each of you being here today. In dr. Steeles testimony he said that one of the effects of quantitative easing was encouraging investors to shift resources into riskier assets. Is that to a problem . In other words you are pretty high on the effects, the positive effects of the qe so if you want to address that question. Yes, it does have that effect. Both domestically money becomes a very cheap asset so you have higher risk assets but in some ways that is the point of qe, to encourage the private sector to move its assets because they are unwilling to take on this otherwise. Then on the dash front qe happens in investors shift into you know assets in india, brazil china etc. , etc. Whether you would view that as a riskier or not i think investors investors between returns and risks so in that sense its a difficult valuation to make. Yes they are going for riskier assets but is also higher term assets and that is how qe works. As we take this down to the individual level, seniors are the most likely to have unsophisticated assets, not risky. All they are wanting to do is clip coupons. My mom is 87 and she doesnt want to invest in a riskier asset in india yet the bank account that she and dad took years to set aside is getting one quarter of 1 . So many of those seniors were driven into riskier assets without the sophistication or the desire. Can you address that possible downside effect . Well, you know one effect of qe is kind of an implicit tax on sabres especially savors of safe assets but the expectation is that because it encourages more investment of consumption, Economic Activity itself and so that is broadly on balance and therefore whatever cost savings to sabres are offset by the higher growth and the higher employment, then would otherwise be the case. You are raising the question about seniors. If history is any guide, those decisions are going to end in tears. Those decisions are what . Going to end in tears. Their ending in tears right now because my constituents are telling me i lived my life correctly meaning i cannot go back and live my life again and you in washington, meaning i think the Federal Reserve, you are taking away those things that made it possible for us to live in retirement. It is ending in tears and yet to me, the Federal Reserve is looking at the effect on our seniors as Collateral Damage. That is an acceptable Collateral Damage to the Federal Reserve and i just think that, to overlook that is really hard. I think in the last minute i would like to talk about, if quantitative easing is a good policy and has positive effects, then all countries should engage in it which in fact if japan is looked at, theyre quantitative easing at double the rate percentagewise we are, so could you address the question, if its good for one country, is it good for all countries and what effect is just japans quantitative easing going to have . Dr. Meltzer of you would take a quick stab at it and also. Or also. I think thats the definition of disaster. Okay, thats close enough. We only have 29 seconds left. I think qe policies are things that people have to do because they are extremely dire circumstances. Japan has had deflation for 15 years so its one of the policies terms they are using in order to get out of two decades of deflation. Are there going to be outsiders . Yes there are going to be. Just as the u. S. That makes its own population. I was in favor of qe1 that is preventing the crisis in 2008. It shouldve ended the policy in 2009. Thank you mr. Chairman. The gentlemans time has expired and round two. We will go right to the gentleman from michigan. Dr. Stiel, i knew a stiel in michigan. I touched on this in my first round and i think that you get at it and im not sure which page of your testimony here but you are talking about is worth recalling that chairman bernanke in june suggested that asset purchases would end with the Unemployment Rate at around 7 . In fact tapering is now only just starting at this level. Just unpack for me a little bit about, my question are we in danger of the world dismissing any of this without dr. Meltzers role that he often brings up whether its a tailor rule or some other rule, unpack that a little bit for me. Chairman bernanke perhaps surprisingly would agree would agree with dr. Meltzer that we need to move towards a more rulebased environment. He wants there to be targets for example on Forward Guidance. The problem is that the feds have been throwing out too many of them. Some of them are conflicting. In some cases the fed has backtracked from them. For example the 7 target that chairman bernanke had. Do you believe that is for economic reasons or political reasons are why are they doing that . I believe that at the time they set their guidance, they believed it was the best thing to do. Then they revisit the data. They have more discussions and they hear criticism in the market and then decide that policy can be improved upon. I was rather struck by the rapidity with which they abandoned their original date based Forward Guidance. You remember in november of 2012 we were told that Interest Rates would not be tightened until the middle of 2015 and we were given an explicit date. One month later we were told that we were not going to deal with dates anymore. We were going to deal with data markers and that particular one that the fed was going to rely on was unemployment. There are two problems with this. First, too many unemployment targets had been laid out for the markets in terms of work sample when tapering will start. Back to your notion of no predictability and stability. Precisely and second Monthly Employment figures themselves are very volatile and the Federal Reserve in my view is encouraging the markets to watch those numbers and predictions of the numbers and rumors of the numbers and react to them immediately. So this sort of policy of saying we are going for example to calibrate asset purchases to Monthly Employment figures could very well unintentionally produce more volatility in the market rather than less. Dr. Lachman. I think we need your mic on. I would just make two points. I thought that the fed was very clear that when it mentioned the employment figures, the employment figures that these were thresholds rather than strict guidelines that would automatically guide policy but i think the second more important point is that one really has to consider from the feds point of view that they are in totally unchartered territory both in terms of their Economic Conditions that they are dealing with and the scale of the policies that they have embarked on. So i dont think that you can do anything but guide your policies by the Economic Conditions as they evolve and theres a great deal of uncertainty in the way in which youre running this policy. All right, in a minute, how do we untangled whether we should eliminate the imfs dr. Meltzer was saying or further utilize the imf . Does anybody care to comment on either the imf or. Let me say i dont want to illuminate the imf. I want to rein it in. That is our money to a large extent that is going to the imf. We are bailing out countries in europe. The countries in europe are presently capable of dealing themselves out. Who is going to bail us out . The imf . Im afraid its future generations dr. Meltzer. If they are lucky enough. I think that the u. S. Investment in the imf is probably a better return than the boom market of 1913. Very little cost, very safe investment. The secret that i should bring out is if you are worried about your investment in the imf the dash status and it has got hold in its credit lines so theres actually no prospect that the u. S. Never gets money back and its the best insurance against future crises for the u. S. And the rest of the world. And though your time is up im going to use the chairmans prerogative. I think that what is being overlooked is to whom is the imf lending money . The imf has never lent money on the scale that it has done with as few are with this bad Credit Ratings as the imf has done so the exposure of the imf to countries like greece, portugal, ireland,. And countries that are hugely indebted and that are very likely to need official debt restructuring so i dont think one can take much comfort from the fact that in the past the imf has always been repaid. The imf had never in the past labonte on the scale to countries with espada Credit Ratings as it has done in the past five years. Mr. Chairman, gold backed or not, this is the chairmans territory. Okay, go ahead. I just find it a bit amusing that today in this day and age greece and. And portugal literally are considered higher risks than in the past zimbabwe, you know all of these what we call the third world. Im assuming some of that is scale. Im going to terminate your long time and then move to mr. Stutzman. Perhaps mr. Stutzman would like to see what dr. Lachman has to say. You have five minutes. It would like to follow up on that but first i would like to say we did have exciting football in indiana when the colts came back to beat the chiefs on saturday. As a chiefs fan you had to bring that up. Your time has been shortened to 30 seconds. Dr. Lachman looking at here testimony and you talk about european policy complacency, i would like for you to talk a little bit more about that and in one of the statements towards the bottom of the onepage essay meanwhile the quantitative easing by both the Federal Reserve and the doj since september 2012 has contributed to further spread narrowing in europe as investors trudge their yield. Could you elaborate on that a little bit more . Basically what we have seen over the past year it is we have seen a marked deterioration in the economic and political fundamentals of a bunch of countries in the european periphery and thinking of countries like greece, portugal and italy and spain. Yet you have seen an enormous amount of Interest Rate reduction so that these countries now are borrowing at very low rates. The way you explain that is the activity by the ecb to, through its outright Monetary Transaction Program saying that it would like the bonds of these countries indeed they came under great stress that there was also the printing of money in the United States and in japan has led to a lot of purchases of that money. My concern is that these low Interest Rates now are lulling these countries into a false sense of security because what we are seeing is the debt levels continue to rise, the budget deficits arent coming down is programmed in these countries now could be going into a deflationary. Map. So when the music stops, when the money isnt being printed in the United States and japan, those countries are going to be very vulnerable because they are not doing the kinds of things that they should to ensure that the euro survives. Your chart here in figure 5 you have the eurozone 10 year Government Bond yields and increased obviously its bikes direct dramatically. Explain to us why did that happen when you have spain and italy remaining relatively flat . Im not sure exactly what year you are referring to. Is this like for greece basically what occurred in greece is that greece eventually defaulted on its debt. It defaulted on its private sector debt and the writedown of that debt present value was written down by as much as 75 . So once the country goes through a debt structuring it gets better credit to the private markets. That is supportive of the bond yields Going Forward. But prior to that, but this was reflecting was that there was going to be a very big debt restructuring which is in fact what occurred. A. I cant remember which gentlemen that was that was talking to mr. Carney about the debt ceiling and i dont think there is anyone that i have discussed here in congress that doesnt want to take the responsibility for our liabilities, shortterm and longterm but what do you suggest, i mean with the conversations here and maybe this is just our problem to deal with but the conversations never seemed to be what doctors steil said about not necessarily concerned about the debt ceiling but the longterm viability that this country has will then take care of our current debt problems or we try to explain that through the restructuring of longterm liabilities, but any advise . Is there anything we can do, i mean we have obviously political arguments to make and also responsibilities that we have to fulfill, but i get very frustrated when we always look short term around here rather than looking at longterm. Any comments . Would all of you agree with that . Congress broadly speaking is very good at dealing with crises as we saw back in 2008, but the longterm debt trajectory in this country is not yet seen as washington is being a crisis precisely because we are able to borrow at such low Interest Rates. There are many reasons for that. Obviously the Federal Reserve, buying up treasury debt is one way in which those Interest Rates are held down. Foreigners such as china buying up u. S. Debt is another way. I would very much hope that we would be able to address our longterm challenges well in advance without having to have the discussion triggered by a crisis caused by a spike in Interest Rate. Is qe. The gentlemans time has expired. I have got to move onto the gentleman from South Carolina mr. Mulvaney who can affect question or whatever question you would like. I want to get to something you mentioned that we were talking about during the questioning which is about other countries. Folks are willing to lend us a fairly low rates that we have a Federal Reserve that is effectively 17 billion a month if my math is right, 900 billion a year. Thats actually going to be more than the deficit this year so is anybody actually lending us any money or are we just printing it all . Doctors steil . Well, this money dr. Meltzer has emphasized has been to a great degree locked up in excess reserves. I understand where its going but the question is where its coming from. If the Federal Reserve is printing 900 billion a year. That is the way money is printed. I am glad that dr. Bernanke before you left decided that we dont print money and everybody recognizes that has not been entirely straightforward but here is a chance i didnt get it chance to to ask a couple be mentioned current manipulation during your Opening Statement to my question is this. If theres a difference between being a developed country in an emerging market let me know but if i was a country interested in manipulating my currency i assume you do that mostly to lower the value of the currency. I guess there could be circumstances where you had manipulated the other way but generally we talk about lowering it. How would i go about doing that . What are the traditional tools that a country can use to manipulate its currency downward . I think china is the best example because it uses three ways, reinforcing ways of doing it. One, it keeps its current country relatively close to capital so the president comes from dollars flooding the market and putting upward treasure on the currency. The second what it does is when the money does come in and in the case of china at least some of it comes in as capital