"How Federal Reserve Policies Add to Hard Times at the Pump" Part 1

okay the sub committee will come to order and let me first apologize to our witnesses we just can’t control the schedule and we were as you know number of votes on the floor particularly I apologize to mr. wanamaker from the great 4th District of Ohio for having to wait then we constituents have to wait that’s even more problem so we’ll get organized we’ll do our quick opening statements and get right to your testimony and the schedules now that we’re postponed we may have many members who are unable to be with us today hopefully someone will be able to join us but we want to thank you all for being here for this for this hearing on such an important topic today’s hearing of the regulatory affairs subcommittee concerns two issues how higher prices at the pump are hurting real people in their day-to-day lives and how to decline and strength the dollar among many other factors has had a significant role in adding to the price at the pump in Ohio the unemployment is rated still at eight point four percent and the average gasp right hit a price hit an all-time high of 416 earlier this month this has put unbelievable strain on families budgets and forced painful sacrifices for the millions of Americans without jobs rising gas prices has compounded they’re already tight financial situations just this week then restoring the Chicago Tribune they reported that higher gas prices have restricted the unemployed from looking for work beyond their immediate communities which has of course limited their options the trucking industry which is which we have represented here today has experienced the full ball of these price spikes the average national cost of diesel fuel is 399 per gallon and trucking companies now being forced to implement a surcharge and higher rates to offset their cost increases and while some industries have been hit harder than others the effects ripple throughout our economy and are being felt at grocery stores pharmacies and in every a place that Americans spend their money we are familiar with some of the factors driving up the price of oil including fear of supply disruptions because of the turmoil in the Middle East and increased demand from developing nations but one major factor often overlooked is the policy discussions and how the weakening of the dollar has caused the price of oil to rise and I would argue frankly the price of many commodities under chairman ben bernanke the federal reserve undertook an aggressive and unprecedented effort known as quantitative easing while keeping interest rates at or below zero between december two thousand eight march two thousand nine the Fed purchased 1.7 trillion of treasuries and mortgage-backed securities the goal of this first round of quantitative easing was to reduce unemployment and sure if the results of QE 1 proved lackluster nevertheless the Fed pursued the the old definition of insanity doing the same thing over and over but expecting different results late last year the Fed began purchasing Treasuries at a rate of about 75 billion a month in a second round of quantitative easing quantitative easing known in the short end is qe2 now that the most basic level quantitative easing is about printing money and the most basic result is that the value of the dollar falls commodity prices increase and American consumers are hit with higher cost of goods and services they purchase unsurprisingly this this is precisely what has occurred the Joint Economic Committee recent reached a study that looked at the strength of the dollar since quantitative easing began and found that the 57 cents of the current per gallon price of gasoline gasoline is directly attributable to the dollars decline today’s hearing will attempt to lay bare the consequences of reckless monetary policy and highlight the need for corrective actions to foster a real and sustainable economic recovery since november two thousand eight the value of the dollar has declined by fourteen percent and it continues to fall in fact by most widely used index of the dollar strength the dollar is now at its weakest point on record and while we may grant that what the Federal Reserve vice-chairman daleko noted earlier last year that the central bank is in unchartered waters experience with financial disruptions of the breath persistence and consequences of the past several years there is no denying the Fed knew full well that’s such an undertaking in the realm of monetary policy could have an awakening weakening effect on the dollar which would mean an increase in the price of commodity bought and sold internationally ironically chairman bernanke testified a couple months ago for the Senate Banking Committee that he knew that rising gas prices could negatively affect American consumers and hinder and economic recovery he stated quote sustained rises

in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability close quote it is the intent of this hearing to broaden the discussion about the causes and effects of higher gas prices so as to fully understand accident the federal government can and should take to a distressed American consumers and American small business owners with that I yield to the ranking member for an opening statement members recognized mr Chairman I want to thank you for holding this hearing and when you and I talked we’re both sharing our concerns about the high price of gasoline that is really quite devastating to families in our respective districts so I think that this hearing will help draw a much-needed attention to the plight of American businesses and families as they struggle to deal with the effects of high oil prices and this hearing brings to us witnesses who are esteemed and their presence here is quite appreciated thank you Congress cannot continue to allow American consumers to bear the brunt of our energy policies which grant oil companies massive tax deductions in exchange for the privilege of reaping an unimaginable profit from extraction from the earth despite the worst economic crisis since the Great Depression oil companies are charging record high gasoline prices and they’ve continued to make the highest profits of any industry in the world low income families across this country including in my own district in Ohio are especially harmed by high gas prices because they have a crippling effect on the price of food well gas prices have recently come down a literal are still too high for many ohioans and Americans who have seen their incomes stagnate and decline and I’m very concerned that the burden gas prices placed on American families and businesses could threaten any economic recovery with gas prices sky-high this hearing can play an important role in helping us understand the cause of oil price volatility as my friend mr. Jordan knows we share a to put it mildly antipathy towards the Fed and at the same time I’m concerned that on this in this particular case that we may risk missing the forest for the trees because in my research I’m still trying to determine what kind of control the Fed has in terms in terms of key drivers of high oil prices now the oil prices have soared recently in part because of the rising demand in developing countries such as Brazil China and India well consumption of oil in the u.s. may be slowing global demand is at record levels causing prices to soar war unrest in the Middle East countries where they’re producing countries has also driven up prices the Fed doesn’t have any control over these price determinative factors and it doesn’t oversee the derivative market for oil that is really at a lot to do with fueling gas price spikes we know the Commodity Futures Trading Commission does have something do with it and what’s been happening is as speculators have been betting on the future price of oil and they’ve contributed to the to the increase sharp increases in oil prices and in what they’re doing is they’re encouraging oil producers to hoard their commodity in the hopes you’ll be able to sell it later at a higher future price so it’s speculation in the in the commodity futures in oil commodities that I think this is something that is very important to focus on the full committee released the report on Monday finding that excessive speculation could be inflating gas prices by as much as thirty percent so I mean do the math and it will pain Ford out over four dollars in some regions that’s what the price has been yesterday the CFTC charged five oil speculators with manipulating the price of crude oil in 2008 and making a 50 million dollar profit from the scheme mr. chairman I’d like unanimous consent to enter into the record in New York Times and CNN money.com article reporting on the CEO and the Commodity Futures Trading Commission enforcement actions oh yeah without a doubt a day and stopping Thank You mr. chairman stopping to manipulation the market for the energy on which were painfully dependent will have a significant impact on lowering gas prices we have to ensure that the Commodity Futures Trading Commission has the resources and authority to implement the dodd-frank reforms passed last year to curb rampant oil speculation most fundamentally

volatility in oil and gas prices will continue to threaten American prosperity until we change our nation’s energy policy we have to free ourselves from oil dependence which has enriched oil companies and left Americans struggling to pay for gas to go to work it’s also left us with an environment that’s been spoiled the path to a sustainable energy future demands that we focus on energy efficient technologies and renewable energy resources for energy supply I want to thank the chairman and thank the witnesses I look forward to your testimony thank you thank thank the ranking member again let me welcome our witnesses and apologize with the change in schedule just we’re gonna have a lot of members who aren’t going to be unable to be here who would otherwise have been here at the one o’clock one o’clock hour we have mr. Vincent Reinhart formerly the director of the division of monetary affairs the board of governors of the Federal Reserve System is currently a resident scholar with the American Enterprise Institute but with this dr Murphy dr. Robert Murphy is he’s an economist with the Institute for energy research dr. Dean Baker is the co-director of the Center for Economic and Policy Research mr. Greg wanamaker is president of wanamaker total logistics and miss Karen Kerrigan is presidency of small business and entrepreneurship Council it’s the practice this committee to swear witnesses in so if you just stand and raise your right hand and then just answer in the affirmative do you solemnly swear or affirm that the testimony you’re about to give will be the truth the whole truth and nothing but the truth if you do so say I do all right thank you let the record show everyone answered in the affirmative and we will go right down the list starting with mr. Reinhart from AEI Thank You chairman Jordan and ranking member Kucinich for the opportunity to discuss monetary policy and the price of oil I believe that this is an appropriate use of the subcommittee’s time as both the net rise and the volatility of oil prices over the past nine months are partly a predictable byproduct of the feds expansion of its balance sheet in its policy known as quantitative easing QE was essentially designed to give a nudge to risk-taking Fed officials announced they would purchase rich riskless Treasury securities on the hope that investors would reinvest the proceeds in riskier assets such as corporate equities and bonds but not all the effects of QE is played out in financial markets since the Fed firmly signaled it in August its intent to launch the latest round of QE oil prices have risen from seventy six dollars a barrel to around a hundred dollars per barrel why does the Fed matter for oil prices the producers of oil as well as other commodities typically sell their output in a worldwide market priced in u.s. dollars thus they care about the current and expected future purchasing power of the dollar and how that will translate into goods and services back home but Kiwi has been associated with higher inflation and dollar depreciation which combines to erode the purchasing power of the foreign producers of commodities thus some of the rise in the nominal price of oil has been to catch up with that erosion more important in shaping near-term oil price dynamics has been to the bend the nudge to investors from QE to move from safe to riskier investments the commodity market has been one outlet for that reinvigorated search for yield this has been reinforced by the Fed policy of keeping short-term nominal interest rates near zero which keeps it cheap to trade on borrowed funds such speculation can fuel spasms of enthusiasm or angst that trigger wide swings in prices although on net and over the longer term speculators neither consume nor produce oil this increase it is in the price of oil and it’s heightened volatility poses three distinct problems for the Fed and for the macroeconomy first a rise in energy costs of one third takes a distinct bout bite out of Americans budgets working to restrain spending in an economy already burdened by lingering balance sheet problems from the financial crisis as of yet the oil price shock is not as large as those associated with severe macro economic dislocations of the past half century though second increases in the price of oil as well as those of other commodities have fueled an upsurge in inflation and add appreciation of the dollar on foreign exchange markets Fed officials continue to believe that people are not likely to expect the prices of other goods and services to rise commensurately if so and if commodity prices do not continue to rise then the level up shift in oil prices will ultimately pass out of inflation

calculations third in recent months the world seems to be a much less safe place this makes the near-term balance between oil and demand and supply volatile this could to the feds regret also make global investors more skittish and undercut some of the benefits and financial markets attributable to QE on net it is likely that the economy wide effects of the energy shock are unpleasant but not D railing to economic expansion but this is a gamble and one that fed officials must apparently have accepted when they decided to launch QE we will live with the consequences of that judgment in coming quarters Thank You mr. Reinhardt dr. Murphy well thank you for having me and thank you for having this hearing I think it’s very important that the public realizes the possible role of federal reserve has been playing in high oil prices unfortunately a lot of my prepared remarks are going to overlap with what mr. Reinhart said so I I wish I had gone first then he’d be copying me but i’ll go ahead and maybe i’ll say his the same points in somewhat different language the so of course what everyone knows is that the Federal Reserve has expanded its balance sheet since the crisis set in by about 1.6 trillion dollars in terms of the what’s called the monetary base so that’s how much physical currencies and circulation plus banks checking account to pay deposits with the Fed as it were so to put that number in perspective from the time the Fed was founded in night late nineteen thirteen up until the fall of two thousand eight they hadn’t put that much in so the Fed has added more in the last two and a half years than the entire history of the fed up until that point and then number it was 1.6 trillion he said right about 1.6 trillion and yeah how much they’ve added since September of 08 to the monetary base and up until that point was 932 billion from 1913 to then so so when we say that this unprecedented interventions I mean that’s not hyperbole it really is and of course we know same time period the price of oil has depending on when you start and stop it it’s almost tripled so the question is do the two have anything to do with each other is the coincidence so in my written testimony I gave the two main mechanisms by which fed policy could be driving the increase in oil prices so the first one is what the Joint Economic Committee focused on in their recent report and what they looked at was just to fall on the dollar against other currencies because as mr Reinhart said oil is an international fungible commodity so oil prices basically have to be the same for everybody once you adjust for currency exchange rates and so if the dollars fall against other currencies that means the oil price quoted in u.s. dollars is going to go up everything else equal so in other words Americans have seen oil prices go up more than the Japanese for example alright so that was so if you look at they looked at the JC report looked at from I guess when qe1 was announced in November of 08 up until whenever this report came out and they said the dollar fell about fourteen percent looking at the index they’re used and so on those calculations that’s how they’re coming up with the figure that if the dollar had stayed as strong as it was when QE 1 was announced up until today them right now gas prices at the pump would be about 57 cents lower okay so that’s that’s the logic they’re using to come up with that estimate is they’re saying the dollar has fallen since the announcement of qe1 and qe2 and hence if the dollar stay the same then gas would be 57 cents cheaper at the pump right now that’s that’s what their argument is there’s a but there’s a whole nother possible mechanism that they didn’t address and that is is it possible that the broad rise in commodities in general regardless of the currency that you’re using could that also be influenced by Fed policy and I would argue that it is but it’s hard to come up with with a quantitative amount just prefer qualitative arguments commodities in general have gone up so it’s not just that oil went up its commodities across the board and even like for example gold and silver since the crisis and fall 08 till now Gold’s gone up about eighty percent and silver something like two hundred and ten percent right so I don’t think that I think it’s very plausible to say at least some of that is due to people are afraid of the dollar being debased and so they’re rushing into the precious metals you know as an inflation hedge it’s not just that people in China are given more jewelry as presents and that’s why gold and silver up so much alright so if you you buy the logic there when it comes to gold and silver it’s not a stretch to say well maybe some investors you know there’s lots of liquidity floating around what are they going to do with their money not going to put it in real estate obviously maybe they don’t want to put in the stock market because there’s the economy’s bad maybe they’re going to go into commodities thinking you know this is surely wheat and oil are always going to have you know a demand and so I’m going

to that’s a way to protect my wealth in case there’s future inflation so that’s the other possible mechanism by which the Fed policy could do work so you know given whatever the world price of oil is that the dollar falls that’s one the other mechanism is maybe commodities part of that a huge upswing is people are trying to hedge themselves against inflation so those are those would be the two it if I could interrupt or say it would you say so that’s not that just maybe just good smart practical investing versus any type of speculator driving the price up well yeah I mean it it depends what your perspective it’s me that’s like saying you know is it it’s cold out because the thermometer is showing a low reading I mean if if people think that something bad is going to happen then they react and that’s that’s the whole point of or one of the points of having futures markets in the first place right is to anticipate future movements will give you a few 30 more seconds if he wants it I took some of your time up bet that’s fine okay health sakes doctor dr. Baker Thank You chairman Jordan and ranking their member Kucinich I appreciate the chance to talk on this set of issues I want to make three main points first what I’m going to say is that the feds policies that most contribute a very small amount to the increase in price of gas secondly i’m going to say that a decline in the dollar is both desirable and necessary and then very briefly i’ll just say that most of the rise in the price of oil has been attributed attributable to other factors and the three obvious ones i think they’ve all been mentioned here one the growth in the developing world to the instability in the Middle East and the third that there is certainly speculation in the oil market which I’d argue has had some effect on prices okay the first point that the quantitative easing policy I find it hard to quarrel I’ve been a critic of the Fed quite often and often quite harsh but I find it hard to quarrel with their policy here we’ve had the worst downturn the country seen since the Great Depression it was a situation I called for a very aggressive response and the Fed gave to my mind a relatively timid one with its policy of quantitative easing given the current circumstances so the intention of course was by buying large amounts of mortgage-backed securities and government bonds that they would not just lower the short-term rate which had already pushed down to zero but lower the long-term rate and this would have three beneficial effects on the one hand it would give some boost to investment secondly it make it easier for people to refinance mortgages we had 30-year mortgages at the lowest rate they’d been in more than half a century third that it would actually lower the value of the dollar that was quite deliberately one of the intentions the idea being that that would encourage net exports it did I would say have somewhat of that effect but i think the impacts actually been very limited I think there’s a real distortion in this discussion in the sense that there was a big run up in the dollar in the fall of 2008 so if you go back and look at the history the dollar rose by around fourteen percent between the the summer of 2008 and the fall which is a direct response to the financial crisis people there’s a flight to safety people I’ve always gone to the dollar when there’s been a flight to safety that’s led to a large increase in the value of the dollar you could perhaps blame qe1 qe2 for helping to stabilize world financial markets and that way getting over that fear but we should have expected that that run up in the dollar would be reversed once we saw the economy stabilize to some extent as it stands now the dollars just a little bit below where it was I think about 2 percentage points below where was before the run-up and I should point out I can come back to this I think there’s a misunderstanding about the broad indexes which is what I assume you referenced in saying was at the lowest level ever I think that when you look at a measurement issue in there it’s really not I can come back to that but the other point I wanted to make in that respect is that the dollar had been falling this is not something it just happens so the dollar had been falling from 2002 until the financial crisis in 2008 and if we just envision we had continued on that downward trend the current value of the dollar is still about sixteen percent higher than what it would have been on that trend so there’s nothing new in this story second point we need a lower value download the dowel or in a system of floating exchange rates the dollar fluctuates to equilibrate trade we have a very large trade deficit currently about six hundred billion dollars the only mechanism I could think of to get that down is a lower value dollar as i said before i take that that was one of the main motivations of the quantitative easing policy because that’s how you boost our net exports you make our exports cheaper for people living in other countries you make imports more expensive for people living in the united states that’s unpleasant but there is no way around it in the context of the price of oil way I would see it is that if we deliberately try to have an artificially high dollar we run a high dollar policy even though it’s leading to very large trade deficits in effect what that means is we’re borrowing money from foreigners to subsidize our consumption of imports in this case we’re talking about the price of oil we’d all like cheaper gasoline i’d like to pay less at the

pump too but i’m not really sure it’s a good policy to tell our kids that were going to be balling huge amounts of money from abroad so that we could have cheaper gas today that’s what a high dollar policy means the last point I was going to say is that you know it’s easy to find the culprits if we want to call them that in terms of what’s pushing up the price of oil we have countries like China which is now the second largest consumer of oil growing ten percent a year India coming up fast as well also going ten percent a year that’s leading to rapid increases in the demand for oil there’s no corresponding increase in the supply uncertainty we all know about the situation in the Middle East and we could certainly fairly easily tie the most recent run-up in the price of oil and went from roughly 80 a barrel to over a hundred a barrel when the civil war in India in in Libya broke out in earnest the last point speculation we know there’s speculation the market ranking member Kucinich refer to the article in The New York Times today about SEC action against speculators that push the price of oil to 150 a barrel before the downturn clearly there’s some speculation again today so just to conclude I’d say that you know if we take a look at the feds actions I’d say for the most part they’ve been you know largely on the right track and insofar as they contribute to the higher price of oil I really don’t think there’s anything we could can or should think to do about that thank you thank you dr. Baker thank you dr. Baker mr wanamaker chairman Jordan ranking member Kucinich I really appreciate this opportunity to testify today regarding the impact of higher oil prices on the trucking industry oil prices have a dramatic effect on our business part of our business is a trucking operation we operate 38 trucks 33 trucks operate in the mid-atlantic and Midwestern states and five other trucks operate locally shuttling loads to our various distribution centers in to our customers plans picking up customers loads in making local pickups and delivery the cost of fuel has risen to be our single largest expense item when I took over our company in 1991 fuel expenses were only six to seven percent of revenue during the last four years our fuel expenses where the following is a percent of revenue thirty-two percent in 2007 41 in 2008 29 2009-13 2010 now in the first quarter of 2011 that expense was thirty six percent of revenue over the years we’ve tried various techniques to better control our exposure to the fluctuation in fuel costs we’ve had our own fuel tanks until the EPA regulations made it uh neckin ah macol for a fleet our sighs we tried hedging a portion of our anticipated purchases to lock in the pricing we contract with fuel service providers to buy it a fixed rate over their costs or up off the listed pump price we’ve set our trucks top speed at 65 miles per hour installed onboard auxiliary power units to eliminate idling gone to wide base tires with a system to keep tires properly inflated at all times and of course we have contracts with our customers that include fuel surcharges to help offset the fluctuation of fuel costs for a fleet our size hedging and contract fuel purchases are extremely challenging and very time-consuming small operations find themselves at a disadvantage trying to find the time necessary to stay informed and educated on the constantly changing pricing structures and formulas the vendors try to institute fuel surcharges are the least cumbersome for us to manage the biggest challenge with this is that customers want you to lock your rates in for a minimum of one year depending on how their business and do is doing and whether they’ll take the time to renegotiate annually can also be an impediment because of our small size in some instances we do not provide enough impact on their capacity to get their attention fuel prices weren’t counting today are having a huge impact the best way to explain this is to illustrate how much profit we lose with fuel prices at the current levels let me explain how fuel surcharges are implemented fuel surcharges only apply to loaded miles our fleets run about fifteen percent empty miles our average truck runs 2,700 miles per week the fleet average is 6.6 miles per gallon fifteen percent of the miles are equal to 405 miles per truck per week which we see no reimbursement from the increased cost of fuel the impact from the average cost they have 250 per gallon for fuel last seen in the fall of 2009 to the recent average of four dollars per gallon is a dollar fifty per gallon on the sixty two gallons it takes to run the 405 miles roughly speaking that’s ninety two dollars in lost money per truck per week remember I told you we run 38 trucks so therefore that’s almost 3,500 dollars per week at the current rate it will be a loss of a hundred and eighty thousand

dollars for the year for our fleet now if it weren’t for the higher fuel prices that we’ve recognized for potential areas for those extra funds first we could invest in more trucks secondly we’d look to increase technology third to increase our drivers pay and finally to reduce the debt on our equipment since 2008 many fleets have reduced the size of their operations and significant amounts of others have simply gone out of business now we’re starting to see a shortage of trucks with the capacity shortage we would utilize the extra money to increase the size of our truck fleet this would create more jobs at our company we could immediately grow our fleet ten percent if the fuel prices were back down to 250 a gallon a primary objective of our company is to look at and invest in new technologies and innovations that can help improve our fuel mileage we do a cost-benefit analysis on any proposed improvements to justify any expenditure it’s imperative that the payback period is shorter than the useful life of the equipment and will not hinder the resale value at trade in time during the downturn in the economy most trucks including ourselves found it necessary to reduce drivers wages to remain competitive if fuel cost could get back in line I believe you’d see an increase in drivers wages across the board our final option would be to reduce the yet we still have on our equipment solidifying the net worth of our company will enable us to secure better financing terms in the futures and it’s certainly no secret that bankers today are taking a closer look at companies depths a net worth ratio during the fuel spikes in 2008 we elected to gradually reduce our fleet down from 64 trucks to the current level of 38 trucks if pricing continues to Val this vacillate will definitely reduced more to prevent losses we certainly don’t like to be put in this position but we can’t continue to put the remainder of our company at risk since it’s our largest expense item stabilization in the cost of fuel is extremely necessary and vitally important to provide the ability for trucking operations like ourselves across the country to remain in business we’ve absorbed the cost increases due to regulations of EPA on our truck engines and fuel storage facilities as well as the escalation of other government regulations and enlarged payroll taxes caused by Hon Hai unemployment and all sectors of the workforce we cannot continue on this wild ride created by speculators and summon our government holding back on drilling opportunities that would reduce our dependency on foreign oil not just trucking companies but the American people need stabilization in fuel prices thank you for this opportunity to testify chairman Jordan thank you Miss wanamaker we appreciate given a small business owners perspective miss Kerrigan well thank you good afternoon chairman Jordan and ranking member Kucinich thank you for hosting today’s hearing and for inviting the views of an concerns of small business owners to be considered on this important issue I’ve been asked to provide a general snapshot if you will regarding the impact of high gas prices on small business owners and entrepreneurs needless to say the high costs are making it very difficult for small businesses to compete to grow and even survive in what remains a very very difficult economic environment for many small business owners sales and revenues remain weak while business costs continue to move higher business owners for example are very very concerned and continue to stay burden with high health insurance cause with employee benefit costs at the same time we’re all material costs continue to go higher supplies shipping etc all these costs can can you to go higher and with the week revenues is squeezing small business owners so obviously costs are a major issue for small business owners how to control them how to contain them how to deal with them and remain competitive in a very very competitive global economy tight cash flows combined with slim profit margins limit the flexibility that many small business owners have in responding to higher costs particularly unexpected ones so unquestionably small business owners are feeling the pinch of higher gas prices the regular feedback that we receive from our members as well as small business owners across the country point to significant effects that we believe are undermining the economic recovery this feedback has been backed up by our latest entrepreneurs in the economy survey that we release this week which finds that the specific ways that business owners are dealing with higher gas prices could have profound consequences for our economy and

particularly if the if prices remain high seventy-four percent of business owners according to that survey report that higher gas prices are having an impact on their business forty-seven percent report that higher gas prices are affecting their plans to hire new employees forty-one percent have raised prices due to higher gas prices twenty-six percent have had to cut employees or their hours worked and staggeringly thirty-eight percent believe that gas prices remain high or increased further their business will not survive obviously how business owners respond to higher gas prices not only impacts their own competitiveness capacity to grow but also impacts the overall health of the United States economy if small business owners are not hiring if they’re cutting hours if they’re cutting jobs our entire economy suppers likewise if small business owners are putting fewer resources into investments and innovative projects the vibrancy of the economy suffers along with the overall national competitiveness so high gas prices are hitting the two major pain points of small business owners obviously higher gas prices are raising business costs which is forcing many business owners to do things like raising prices that put that at a competitive disadvantage secondly high gas prices are hurting sales as customers have fewer disposable dollars to purchase the goods and services provided by small business owners and as I noted in my written testimony a a survey dollardays.com survey found that sixty-four percent of business owners report lower sales due to higher gas prices especially as our nation is working to emerge from the recession it is more important than ever that small businesses operate in a more predictable environment I think they continue the continued to tell us that uncertainty pretty much rules they’re there every day operations without certainty without predictability small business growth will be studied and these firms simply will not be able to create the large-scale number of jobs that are that are desperately needed by our economy thank you again for hosting these hearings and i look forward to your questions thank you miss Kerrigan and all our witnesses mr. wanamaker you mentioned your fuel cost of 146 percent i think you said six or seven percent to now somewhere in the last three years a range of thirty to forty percent that accurate yeah I mean it just it’s huge and obviously it’s had an impact on your industry and I assume every other trucking industry out there but do you have you noticed your customers that it’s impacting them if we look listen to miscarry ins testimony obviously it is but have you seen that in a first-hand way with your with your customers and that you deal with yes the biggest impact is you get the the small companies that aren’t you know the larger companies are familiar with fuel surcharges and are willing to absorb that but it’s the smaller companies that don’t ship as many truckloads in a week that it really it’s alarming to them and they try to absorb those things rather than try to pass them around to their customers right right and you’ve seen that as well miss Kerrigan adulta to the surcharge issue if you had any specific issue examples with with your folks on the surcharge issue on being impacted by our charges I think on shipping I think is a huge one you know where you know if anything that they are receiving up Flores I think the florist industry in particular are receiving you know fair enough fair amount of surcharges on shipping yeah the other thing you mentioned in your testimony miss Kerrigan was the other regulatory concerns that that are other regulations that are concerned to business owners one of the focuses of this subcommittee is you know regulation and how that impacts business talk to me about some other thing in addition to the gas price issue we got other things that governments doing talking about some of the specific things that you think are negatively hurting job growth and economic growth right now well gosh where do you start your miserable one big one I think it’s a health care issue and you know the concerns about what the health care reform bill as it gets implemented what it means for the for their health insurance costs or because they don’t see them going down they can see continued to see them going up you know what the employer mandate is going to mean you know for their business what the fines are going to need um and it’s

this cumulative effect that that I concerns me and it concerns many members of Congress and obviously concerning so it’s not just you can point to once but it’s it’s one on top of the other now you throw in the gas price you want to top of the other there’s a tax issue and what their taxes are going to be I mean there’s the implementation of dodd-frank what is going to be in terms of their costs and active ale ability of capital and loans it is all that is very difficult to get traction and a business owner needs momentum they need traction in order to grow and have the confidence right to do the things that they need in order to invest in to create jobs mr. want to make any comment on the cumulative effect that concerns so many of us you know it is it’s just a compounding of when you have the EPA issues for example the when the EPA changed the regulation on the truck engines we ended up paying about for the first round it was about 6500 dollars for just the EPA regulations the second round was an additional eight thousand dollars and so it’s just a compounding thing of those type things when we went to low sulfur fuel which gave us lower fuel mileage higher cost trucks lower fuel mileage and you know we can only pass on the fuel surcharge based on the price of fuel so that was also a loss and then what miss Kerrigan said also about the health care I mean that just creates such an instability in your mindset as far as going forward those added on cost of government regulations that really have no really don’t belong there in a lot of instances mmm-hmm great let me let me turn to our other guys then we’ll do a second round here I’m just curious and let me start with maybe mr. Reinhart in the last couple years is and I’m genuinely don’t know the answer to this one has the Fed been the largest purchaser of Treasuries are they the single largest purchaser and or holder of Treasuries in the last say two years no actually here’s a good comparison surprised me because I think it’s like 75 billion in certain limited night so when the Fed said who’s the largest holders it’s like quantitative easing on qe2 on the table in August since then it has expanded its a balance sheet by five hundred billion dollars of extra Treasury securities okay over that same period foreign official entities have increased their holdings of government securities held in custody at the new york fed by one trillion dollars okay so in some sense is dr. Baker noted the net chain depreciation of the dollar has been pretty modest so you can’t say it contributes a lot to the rising oil prices but that actually masks to affects the Fed has been buying Treasury securities with 500 billion dollars of extra dollars but which would tend to move the dollar lower here but at the same time foreign official entities have been buying a trillion dollars of Treasury securities with their own currencies tending to offset what the feds doing okay but you said foreign so total for foreign holdings of Treasuries is bigger than the Fed is also said the single biggest hold are they bigger than so the single biggest entity holding Treasuries today or last year’s would be would be the Fed the single biggest entity in terms of the stock holdings of trek government securities right now would be foreign official entities or on the federal yes that is the reserve managers behind India Russia Brazil and the like and then would the Fed be second fed to be such a head of other funds and individuals in etc yes ok ok I’ll get back our this up I want to get to our ranking member and we’ll do another round let me ask mr. Rhyne are just a quick follow-up I was distracted for a second I want to make sure I got your answer of the trillion dollars that’s being purchased did you say who’s buying those who brought China you said so so all we know is that the Federal Reserve Bank of New York holds Treasuries government securities in custody for foreign affairs right now okay but if that went up a trillion-dollar I don’t know the composition of booking dr. Baker and March second 2011 congressional research service report entitled US trade deficit the dollar and the price of oil which I going to ask unanimous consent the enter into record No thank you mr. chairman ennis CRS agrees with your assessment that the Fed’s monetary policy actions here have not been the main driver of higher oil and gas prices now can a case however be made here that there is a tangential effect that the Fed has on these prices I mean at some of our witnesses have made that would you comment on their analysis well again I would say and the CRS report of course agrees that there was some impact on lowering the dollar but again I think

that was relatively modest you know I think most evidence suggests that the the other issue is I’d said and the other witnesses I think suggest as maybe put in a different way but that the low interest rate environment does create a situation which you likely to see some speculative run-up in the price of oil and other commodities and I think that’s certainly been true that was certainly true in the period in 07 08 when oil hit 150 dollars a barrel and it’d be surprising to me that there’s not some speculation there today it just stands to reason that when there are sharp movements almost invariably at least some of that is driven by speculation does this speculation driven by being able to trade with borrowed money of course you know speculators tend the way you make money as a speculator is you become heavily leveraged and if you could do so cheaply than it makes it easier to speculate let me ask you well first of all just a preface we can debate the causes of high oil and gas prices but I think that you know just in my own opinion we have to keep in mind that the u.s. ranks second in the world and fossil fuel consumption and energy producing companies have used our dependence on oil to enrich themselves and and pollute the air in the land it’s it’s clear to me that what we’re seeing is a result of monopoly and by that I mean when it comes individual transportation there’s only one source major source of fuel and that’s oil the Americans depend on it every day to get to work at their kids to school did groceries conduct their daily lives businesses are dependent on it as has been pointed out so the demand for oil is fairly inelastic when demand is inelastic there’s a monopoly and supply conditions are ripe for the kind of price manipulation that was documented in the minority report issued on Monday and that led the Commodity Futures Trading commissioned to charge five oil speculators with illegal price manipulation yesterday dr. Baker can you talk a little bit about the effects of monopoly of oil on our economy and about the possibility that breaking that monopoly with alternative energy sources what that would mean for our economy sure I just realized earlier I’ve made a reference to the Securities Exchange Commission your creditors of commodities future Trading Commission they brought those charges so just to correct my earlier statement thank you yeah I I I see it as a situation as in effect we were subsidizing oil consumption part of that story being an overvalued dollar so in a situation where we’re running a very large trade deficit in effect what we’re doing is borrowing money to get oil and other imports cheaper than would otherwise be the case if we had a dollar that was consistent with more balanced trade and obviously when you have a situation where there’s a relatively small number of oil companies they’re in a position take advantage of shortages temporary shortages it makes it in a more volatile environment because as you say quite correctly at least in the short term demand is very inelastic when you have a relatively small number of suppliers supply can be very analyzed let me ask you something got about a half minute Thank You mr. chairman what would you how would you explain to my constituents simply I mean we’re talking about some fairly you know fairly the high-level abstractions here in terms of you know money supply the role the fed how would you explain this in layman’s terms to the to the average motorist who is paying forward who was paid four to five dollars a gallon about why is this happening put it in layman’s terms well I guess I would say there’s two parts to that story one is you know certainly the short-term story where I think the price has gone up more than we’d be justified by the fundamentals do the fact that you have speculators that are pushing up the price so you’re speculators who are thinking prices will be higher in the future or at least for a short period of time they’re hoping to get speculators are driving up the price that’s one fact that’s one for the other factor the other factor is simply the long-term story that oils commodity and relatively limited supply demand is increasing very rapidly in the developing world and it’s almost certainly going to outstrip the rate of growth of supply and the only way you can reconcile more demand and relatively them increase in supplies with a much higher price and so even without speculation Thank You mr chairman even without speculation your your based on the supply demand that you’re talking about you’re saying that the price of oil if not if nothing else changes in terms of alternative sources the price of oil is going to go up as out you’re saying exactly I don’t see any story where if we look out five years from now and let’s say there’s no speculators you know we’re just looking at what the world economy looks like plausible projections of growth I don’t see any store in which the price of oil is not considerably higher than is today okay I mr. chairman thank you for your indulgence on that no problem mr. Baker you said earlier about subsidizing oil

consumption tell me that what was the statement you made earlier that we were when we were doing that and what that in effect by having a large trade deficit which is associated with an overvalued dollar we’re subsidizing our consumption of oil and all imports and paying for that with money that we’ve borrowed from foreigners that their course owns a trade deficit let me address which I think raises the question so do you think rising fuel costs are a good thing I think that they’re an inevitable thing that’s part of the Cedeno as you do you think they’re a good thing you think they’re a positive thing I think there’s pause I’m not trying to be evasive there’s positive aspects to it I mean it will enlighten or negative aspects as well of course none of us want to pay more for gas businesses are going to be very hard very well because the dollar will fall so we’re going to see a lot of jobs created in export industries also in import competing industries because imports are now more expensive there’s going to be more let me get back to dr Murphy you made a point earlier you said I believe added to the monetary base 1.6 trillion since sep tember of OA to today from 1913 2 2008 932 billion so in three short years or less than three years more than we did in I didn’t the math but what’s at almost 80 some years are 90 80-some years and mr. mr Baker I think called that timid in his opening statement that the the Federal Reserve’s approach to this was timid did I assume you disagree with that right I disagree strongly and it’s I mean it partly it’s a difference in our perspective as to what the appropriate policy response is that if I believe that the problem was that Alan Chairman Alan Greenspan had interest rates too low after the.com crash that helped fuel the housing bubble and so that was the wrong thing to do that caused male investments and and so to me what Chairman Bernanke has done is just doubled down on the wrong policies that chairman Greenspan put into place yeah but I think dr. Baker’s coming from a different perspective obviously and so right so they would say it’s timid because look at it didn’t work fully so we need to put more medicine in whereas I’m saying no that’s poison just pumping in you know extra money that you’re creating out of thin air to use a colloquialism give me this maybe you and mr. Rynerson second rank order I mean look because we got supply and demand concerns we got turmoil in the Middle East we got those who say speculators and then we got the the Fed and quantitative easing into that devaluing of the dollar so rank order and let’s let just four the starters say all have some influence on on the price of fuel and ultimate price gasoline so but but rank order them in which one has the biggest which a second which is third in which it for and and I would also well I’ll get to that article in a second but do that first thing we’ll go to mr Reiner dr. Murphy sure sure I mean I think we should just be humble and say nobody knows for sure we would have to turn back time and do the alternate universe to see what actually happens right so this is all speculative no pun intended I think I personally think that the Fed has been has not fixed the problem okay so it’s true is dr. Baker was saying you could argue well no the Fed averted a catastrophe and so therefore even though we’re a sense both agreeing the Fed caused oil prices to go up he’s saying that’s you know arguably a good thing and in one perspective but I don’t think we’re out of the woods yeah I think you’re you know yours from now we’re still gonna look back and say one of the economy going to get better so in that sense I I think the Fed is I personally would say it’s the Fed now in terms of speculators again that’s sort of a loaded term but I mean it if people are worried that the dollar is going to depreciate strongly where first questions yeah that’s that’s what they’re partly they’re supposed to do normal behavior function is a futures market is supposed to get it allow that um so you would but you would say the feds actions are the number one reason that the price of gasoline for families and business owners went more so than turmoil in the Middle East more so than rising demand from from countries and rising demand period you know more so than supply demand concerns if you from the fall of two thousand eight till now yes I think if you’re saying it should like last six months the Middle East i think is far bigger influence of what’s going on for but over the last three years right if i had to pick one mr Reiner did you come in the rank order in question so one thing I do want to make clear is the distinction between the relative price of oil and the nominal price of oil it’s similarly the real exchange rate and the nominal exchange rate we need real exchange rate depreciation to adjust the trade accounts maybe we should think about a way of getting that with it without as much domestic inflation we global supply

and demand is such that the real price of oil is going to be going up over time but Fed policy will determine how much of that real price increase turns into money nominal price increases and I think over the longer history of the Fed that is over the last couple decades the very high nominal price of oil relates to the Federer’s failure to achieve price stability and so if you’re looking for the big picture wire oil prices so high over the last two decades it’s got to be about Fed policy because the Fed responsible for the nominal prices everywhere right okay now if you’re asking in the last year or so or over the whole profile quantitative easing I would say that is mostly something about the balance of real supply and demand the Fed comes comes second and i would put a put third speculation right there’s been a bit of discussion about the CFTC ongoing case and it’s not appropriate to a pine on a nope you know in the open case but I think you have to remember three important points and the first is in the futures markets almost nothing settles into a cash transaction that is the futures market is very large relative to the cash market so trying to manipulate cash to affect the futures market is the tail wagging the dog but but second in a very short period the tail can wag wag the dog even in the in the CFTC’s press release of yesterday they say it was a strategy designed to first raised in fenton lower oil prices so in the short run speculation can matter but the short run it can be you know relatively short the third we do have to worry about speculation in the market because it raises volatility of prices and that’s just a deadweight loss for everybody it’s just more expensive to use those markets officials efficiently for hedging okay thank you gentlemen from Cleveland gentleman from Seattle careful careful I’ve heard the witnesses talk about the the world of fed here and it’s and that’s what’s make this hearing very instructive because all you know including dr. Baker all talk about the Fed s summer oh here you know there might be some debate about what kind of role about where it falls in in the hierarchy of economic effects on the price of oil you know you talked about supply and demand then then then the Fed intense speculation yeahhh mister mr Reynard my right and then which is okay so and we’re talking about the feds Paula see since since 2008 you know the role that that’s had on the price but what what hasn’t been discussed here and what I’d like to ask you to to consider and maybe just give me some quick response on is the fact that in 1913 when the federal reserve was created it actually created the transition away from the article 1 section 8 responsibilities that are constitutionally vested in article 1 to Congress for the purpose of coining money or controlling the money supply that was taken away you know the Fed ends up with the responsibility so my question to you is if if we see that the the variable effect excuse me and sometimes the adverse effect which the Fed has in the management of these things the question becomes what about what about having the Fed being put back in a control of the government as the founders intended for example being put under Treasury would you comment on that and you know if we’re really talking about about the Fed as something that we really have very limited control over what do you think of that so I see the Federal Reserve Act is a delegation of congressional authority given to it in the Constitution to an independent agency the Federal Reserve fundamental to that was the implicit belief that that independence would lead to better monetary policy over the long run the cost there are short run and long run considerations something decided in the Congress lends itself to a short-term gain and not enough assessment of the long-term benefit the idea was giving

the Fed independence so he can take account of the longer run benefits of price stability I think the record is not good for the Federal Reserve in taking account of that longer run respond dr. Merck dr. Murphy would you say the record is not good and over the over the long haul here or what would you say well right I mean the Fed was created to get rid of wild ups and downs then after they formed it there was a great depression so I mean it’s the feds not had a great track record over this history as far as your your question your broader question and I’m speaking on my own this isn’t an iar position on monetary policy obviously but I I don’t think the issue is well should it be Ben Bernanke right now making Fed policy or Treasury secretary Geithner I don’t you know I think if you’re going to if you’re I mean there’s some question about the structures here of whether or not there’s public accountability responsibility if you can print you can use