    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                         H.R. 1207, THE FEDERAL RESERVE
                            TRANSPARENCY ACT OF 2009

    =======================================================================

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               SEPTEMBER 25, 2009

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 111-80

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     BARNEY FRANK, Massachusetts, Chairman

    PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
    MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
    CAROLYN B. MALONEY, New York         PETER T. KING, New York
    LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
    NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
    MELVIN L. WATT, North Carolina       RON PAUL, Texas
    GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
    BRAD SHERMAN, California             WALTER B. JONES, Jr., North
    GREGORY W. MEEKS, New York               Carolina
    DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
    MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
    RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West
    WM. LACY CLAY, Missouri                  Virginia
    CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
    JOE BACA, California                 SCOTT GARRETT, New Jersey
    STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
    BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
    DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
    AL GREEN, Texas                      TOM PRICE, Georgia
    EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
    MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
    GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
    PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
    KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
    RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
    CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
    ED PERLMUTTER, Colorado              BILL POSEY, Florida
    JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
    BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
    ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
    JACKIE SPEIER, California            LEONARD LANCE, New Jersey
    TRAVIS CHILDERS, Mississippi
    WALT MINNICK, Idaho
    JOHN ADLER, New Jersey
    MARY JO KILROY, Ohio
    STEVE DRIEHAUS, Ohio
    SUZANNE KOSMAS, Florida
    ALAN GRAYSON, Florida
    JIM HIMES, Connecticut
    GARY PETERS, Michigan
    DAN MAFFEI, New York

            Jeanne M. Roslanowick, Staff Director and Chief Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        September 25, 2009...........................................     1
    Appendix:
        September 25, 2009...........................................    57

                                   WITNESSES
                           Friday, September 25, 2009

    Alvarez, Scott G., General Counsel, Board of Governors of the
      Federal Reserve System.........................................    12
    Woods, Thomas E., Jr., Ph.D., Ludwig von Mises Institute.........    45

                                    APPENDIX

    Prepared statements:
        Garrett, Hon. Scott..........................................    58
        Marchant, Hon. Kenny.........................................    59
        Alvarez, Scott G.............................................    60
        Woods, Thomas E., Jr.........................................    71

                  Additional Material Submitted for the Record

    Bachus, Hon. Spencer:
        Financial Services Committee Republican Plan for Reforming
          the Financial Regulatory System............................    74
        Text of H.R. 3310, To reform the financial regulatory system
          of the United States, and for other purposes...............    80
    Foster, Hon. Bill:
        Responses to questions submitted to Scott Alvarez............    84
    Watt, Hon. Melvin:
        ``Federal Reserve System Monthly Report on Credit and
          Liquidity Programs and the Balance Sheet,'' dated September
          2009.......................................................   168
        Minutes of the Federal Open Market Committee, August 11-12,
          2009.......................................................   199
        Federal Reserve press release, dated September 23, 2009......   209
        Editorial from The Wall Street Journal entitled, ``Economists
          Warn Fed Independence at Risk,'' dated July 15, 2009.......   210
        Petition from The Wall Street Journal entitled, ``Petition
          for Fed Independence,'' dated July 15, 2009................   212

                         H.R. 1207, THE FEDERAL RESERVE
                            TRANSPARENCY ACT OF 2009

                                  ----------

                           Friday, September 25, 2009

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 9:01 a.m., in
    room 2128, Rayburn House Office Building, Hon. Barney Frank
    [chairman of the committee] presiding.
        Members present: Representatives Frank, Watt, Sherman,
    Moore of Kansas, Lynch, Miller of North Carolina, Green,
    Cleaver, Perlmutter, Donnelly, Foster, Minnick, Adler, Grayson,
    Himes, Maffei; Bachus, Castle, Royce, Paul, Manzullo, Biggert,
    Capito, Hensarling, Garrett, Neugebauer, Price, McHenry,
    Putnam, Bachmann, McCarthy of California, Posey, Jenkins,
    Paulsen, and Lance.
        The Chairman. The hearing will come to order.
        And I will begin with a little history. This is an historic
    hearing. The gentleman from Texas, Mr. Paul, filed this bill
    for the first time in 1983. There then ensued a number of
    things, including 12 years in which the Republican Party
    controlled the agenda of this committee and found no time for
    this hearing.
        I am very pleased in this show of bipartisanship to have
    been the one to give this important piece of legislation its
    first hearing ever, indeed. And I think this history is
    relevant, because we ought to be very clear this is not a
    partisan issue.
        The first time this committee, in my experience, having
    come here in 1981, engaged with the Federal Reserve--and I
    think it really was true of the 1970's and 1960's, as well--but
    the first time this committee dealt with the questions of
    openness and transparency of the Federal Reserve was under the
    leadership of the great chairman who is pictured over my right
    shoulder, Henry B. Gonzalez.
        In fact, a former chief economist of this committee, Robert
    Auerbach, has written a book, and I get no share of the
    proceeds, but it is entitled, ``Deception and Abuse at the Fed:
    Henry B. Gonzalez Battles Alan Greenspan's Bank.'' It is a
    description of the efforts by Mr. Gonzalez, ultimately
    successful, to compel the Federal Reserve to be more open, and
    it isn't pretty.
        It is astonishing to me to remember that, when I first came
    here, the decisions of the Open Market Committee were never
    announced. Now, how you influence interest rates by concealing
    from the market what you decided to do is very odd. What it
    shows is that the penchant for secrecy outweighed the desire to
    be effective, because it clearly could not have been as
    effective to have a secret directive to the markets, which, of
    course, got leaked and distorted, etc.
        There were minutes that had been taken at Federal Reserve
    meetings. The Federal Reserve, at the time, 1983, denied--or in
    the later 1980's, when Mr. Gonzalez became chairman--that there
    had been minutes. They were later ``found in a drawer.'' There
    were not reports released.
        This is not a new thing for this committee. There was an
    effort to open it up, and there was significant increased
    opening.
        The other point that is relevant, and I do want to say to
    make sure this is not a partisan issue, facts on the record: In
    2003, the gentleman from Texas, Mr. Paul, was in line under
    seniority to be the chairman of the Domestic Monetary Policy
    Subcommittee. That subcommittee immediately disappeared. It was
    merged into the International Monetary Policy Subcommittee,
    because there were people who were trying to shield the Federal
    Reserve from Mr. Paul's influence.
        Two years later, when they could not merge that
    subcommittee further into the Housing Subcommittee, although
    they probably thought about it, a member of this committee with
    some seniority who had not previously taken a subcommittee
    chairmanship, Congresswoman Pryce, was persuaded to come over
    and do this.
        This is the first time since the bill was filed and despite
    a bipartisan ignoring of the issue that we have had the
    hearing. And we are serious about some legislation in this
    regard.
        I will say I have a couple of concerns. The Federal Reserve
    engages in considerable market activity. They buy and sell. I
    do believe that it is important in our society that the buying
    and selling be made public. We don't want public entities
    buying and selling securities with nobody ever knowing.
        I also believe, however, that some time needs to elapse so
    that their buying and selling does not have a direct market
    effect, so that other people can't ride on it.
        So that is one area where I will be working with the
    gentleman from Texas, and we have discussed it. We want there
    to be publicity; we don't want there to be a market effect in
    the near term. We don't want people trading with the Fed or
    against the Fed, etc.
        As to monetary policy, I think it is also clear, I believe
    and have exercised that right for some time to comment on
    monetary policy. The notion that no elected official should
    ever comment on something as important as monetary policy is
    profoundly antidemocratic. And I believe that we should
    continue to do that. It is something I have been doing since I
    got here.
        We don't want to give the rest of the world or, more
    importantly, domestic investors, the impression that we are
    somehow, in a formal way, injecting Congress into the setting
    of monetary policy, because I think that could have a very
    destabilizing effect. I don't think that will be hard to do
    without, in any way, interfering with the audit function.
        But how the Federal Reserve carries out what it is doing,
    its buying and selling, what it buys and what it sells--all of
    those, given its importance, can entirely and legitimately be
    made open.
        And I will say this: There were predictions. One of the
    things that the media fails to do is, the media rarely passes
    up a chance to refute those of us who are in office, but they
    get bored too easily. There are often predictions of doom
    whenever people in Congress propose to do something. Very
    often, those predictions of doom go unrealized, and there is
    too little checking.
        I urge people, if you are interested in this, to go back to
    some of the predictions that were made in the late 1980's, when
    under the leadership of Henry Gonzalez, the Fed was not--didn't
    legislate, but was pressured to make some changes. Read about
    the predictions of doom, and note that none of them came to
    pass.
        I believe that we are similarly able, in a wholly response
    way, without in any way interfering with the independence of
    the monetary policy-setting function or with the integrity of
    the markets, to go forward with completing the job. And I would
    say ``completing'' the job. It really did begin with Henry
    Gonzalez, but completing it. A lot needs to be done, and the
    gentleman from Texas has been in the lead in pushing for that,
    of making sure that this important part of our Federal
    Government is subjected to the same rules of openness that
    every other element in a democratic government should be.
        The gentleman from Texas.
        Dr. Paul. I thank you, Mr. Chairman, for calling this
    hearing, finally. It is very good that we are having this
    today.
        I would like to say that, at the present time, we have 295
    cosponsors of the bill in the House. And a recent poll showed
    that 75 percent of the American people support the auditing of
    the Fed.
        But I wanted to start, too, with a little bit of history.
    In 1981, we were holding a gold conference hearing. Don Regan
    was in charge of the very first hearing, and he insisted that
    no media be allowed in, no guests would be allowed in, no
    records be kept. And that got out on the outside, and, due to
    public pressure, the meetings were finally open. And his
    argument was, well, it would affect interest rates, it would
    affect the dollar, and it would be detrimental to the market.
        So a lot of these arguments are thrown out there
    unnecessarily. But too often we equate this idea of
    independence with secrecy. If we substitute the word
    ``secrecy'' every time we talk about independence, we will know
    what we are talking about.
        One time many years ago, Arthur Burns was asked about
    whether or not the Fed had to do what the President wanted. And
    he said, ``Obviously, it does, or it would lose its
    independence.'' And that is about it. It is very, very
    politicized, but it is done in secrecy. The President has
    influence, and we do know that; there have been books written
    about this. As well as what is happening now, there is a
    political influence by private companies and banks and foreign
    governments and foreign central banks. And the American people
    deserve to know this.
        One of the charges made is that, if we have these audits,
    all of a sudden we are going to take over monetary policy.
    Chairman Frank and I, as he has just stated, have talked about
    this. We are going to make it very, very clear that it is not
    our intent to take over monetary policy.
        But, quite frankly, the way the bill is written, I don't
    believe we could, and I don't believe we should either.
    Although there are two sides of this issue arguing for the
    audit, we don't necessarily agree with what monetary policy we
    should have. So that is not the issue here.
        But one thing one should think about is this argument that,
    if we have an audit, we are going to influence policy. How many
    audits does the GAO perform? In all agencies of government--in
    the State Department, in the DOD--nobody has ever charged the
    GAO for altering policies. So I don't think that is a fair
    charge, that we would be taking over policy.
        Actually, transparency conveys trust. It was found that in
    these recent bailouts, instead of it hurting companies if they
    knew they were being helped by the government, it actually
    helped those companies, their stocks went up, rather than
    saying that they became tainted just because they knew they
    were talking to the Federal Reserve or to Treasury.
        Today, we have before us a bill that actually offers an
    opportunity that the people have been fighting for, for a good
    many years. Chairman of the Banking Committee Royce, as well as
    Wright Patman and Gonzalez, they have all argued this case. But
    the conditions today merit serious consideration for this bill
    and passage of a bill like this.
        The American people know it, and they understand it better
    than ever before because of the crisis of the financial system.
    It is not because of me. Like it was said, I did it for a good
    many years, and nothing happened. But the financial crisis has
    gotten the attention of the American people, and the American
    people say, ``Not only do you have a right to do this, as a
    Member of Congress and as Congress itself, you have an
    obligation to do this.''
        So I am delighted that we have gotten to this point, and I
    am sure that we will have a positive discussion today.
        Thank you, Mr. Chairman.
        The Chairman. The gentleman from North Carolina--
        Mr. Watt. Thank you, Mr. Chairman.
        The Chairman. --for as much time as he consumes.
        Mr. Watt. First of all, I want to thank the Chair for
    convening this hearing and doing so at the full committee
    level. The chairman and I have had some discussions about
    whether to do a hearing of this kind at the subcommittee level
    or at the full committee level. And I think the chairman is
    correct, that this is a subject that deserves discussion by the
    entire committee, not just at the Domestic Monetary Policy
    Subcommittee level.
        I want to supplement the history that both the Chair and
    Mr. Paul have already stated in the record. Mr. Paul is the
    ranking member of the Subcommittee on Domestic Monetary Policy.
    And, while this is the first hearing directly on the bill that
    has been introduced by Mr. Paul, we have had several tangential
    discussions of this in the subcommittee, in various ways. And
    Mr. Paul has had an opportunity to question the Fed about this.
    We have done it, though, in the context of the regulatory
    reform discussions that we have been having. And I will come
    back to that in just a little bit.
        Perhaps, other than general regulatory reform itself and
    health care reform, there is probably not another issue on
    which I get more contacts from people out in the public. I am
    not sure they are all my constituents, but certainly people
    mobilized are on this issue. And most of them identify, in
    general, with the position that Mr. Paul has outlined in his
    legislation.
        In a sense, I think the question is not whether there will
    be some kind of increased audit of the Federal Reserve, but how
    that will take place. And I think there are three issues that
    arise there when we try to define how that will take place.
        Two of those issues, the major issues, I think, have been
    outlined by the Chair of the full committee in his opening
    statement. And I suspect that most, if not all, of the
    subcommittee and I hope all of the full committee would agree
    that whatever we do would be done within the constraints
    outlined by the Chair in his opening statement.
        The second issue is whether we would do it inside or
    outside the issue of regulatory reform, whether there would be
    a separate bill on this issue, or whether it would be done in
    the context of regulatory reform.
        Mr. Paul and I have had some discussions about this. And it
    has been my position, although not so strong that I would fight
    either him or the Chair of the full committee about it, that
    whatever we are going to do on this issue probably ought to be
    done in the context of regulatory reform. Because, right now,
    we are not sure what the full territory of the Federal Reserve
    will be once regulatory reform gets done. And whatever audit
    provisions we adopt ought to be consistent with the new Fed
    authority rather than consistent with just the Fed's authority
    as it currently has.
        And the third issue is one that I think maybe the general
    public is not quite as aware of because, when the general
    public thinks of an audit, they think of an audit of the kind
    that accountants do in the regular course of business. A GAO
    audit, on the other hand, is a lot more expansive, or can be a
    lot more expansive, than a CPA's audit of a business. It can
    get into really second-guessing a lot of procedures. And that
    can get touchy, especially if we were dealing with monetary
    policy issues, which I think we need to try to stay away from
    as vigorously as we can.
        But all of those issues, I think, are issues on which Mr.
    Paul's bill has stimulated extensive and good and constructive
    discussion about and issues that I think will be and can be
    resolved in the context of either an independent, free-standing
    bill or in the context of regulatory reform.
        I think having this hearing at the full committee level
    formalizes a process for getting to a result that all of us are
    hopeful that we will be able to get to. And I thank the Chair,
    again, for convening the hearing.
        I thank Mr. Paul for being an articulate and determined and
    long-standing advocate of this position. He certainly has
    pushed the issue forward, and I think he is going to get some
    great results out of his efforts.
        The Chairman. I thank the gentleman.
        I would just say--because we have 15 on each side, and we
    are not going to use it all up on this side, so I will take a
    minute--the gentleman from North Carolina has been a great
    asset as Chair of the Domestic Monetary Policy Subcommittee. We
    are having this in full committee because there was a lot of
    interest from a lot of members, so it just made it easier to do
    that. But his guidance has been very helpful. And I very much
    agree with the points he added that we will be approaching.
        And now I recognize the ranking member of this committee,
    who was also the first member of the committee to, in fact,
    appoint Mr. Paul to the position of some responsibility over
    the Fed, the gentleman from Alabama, Mr. Bachus.
        Mr. Bachus. Thank you, Mr. Chairman. And I think that
    appointing Dr. Paul to this position has proved to be a wise
    decision.
        Mr. Chairman, this hearing is on the Federal Reserve
    Transparency Act of 2009, which is sponsored by our colleague
    Dr. Paul and, I think, the vast majority of the Republicans on
    the committee.
        In his role as ranking member of the Subcommittee on
    Domestic Monetary Policy and Technology, Dr. Paul has been a
    consistent champion of the taxpayer and a strong advocate for
    greater transparency and accountability at the Federal Reserve.
        Americans are tired of paying for Wall Street's mistakes
    with costly bailouts, many of which have been funded by the
    Federal Reserve. Over the last year-and-a-half, the Fed has
    used its authority under Section 13(3) of the Federal Reserve
    Act to conduct a series of extraordinary interventions into the
    financial markets that have doubled the size of its balance
    sheet to over $2 trillion.
        In fact, in testimony yesterday before the committee,
    former Federal Reserve Chairman Paul Volcker expressed his own
    misgivings about invoking 13(3). He said, ``I have mixed
    feelings about that because I squirm when it is used, frankly.
    We spend a lot of time trying to avoid its use because we knew,
    if it ever got used, it would become a precedent of the
    future.'' That is why the Republicans on this committee have
    introduced our alternative reform bill, which actually does not
    allow the Fed to invoke 13(3) to bail out specific
    institutions.
        Most of us were at the hearing the day before yesterday
    when we urged Secretary Geithner to say there would be no
    bailouts and he would not be invoking 13(3). And he actually
    declined to say that he wouldn't use it and use as much as a
    trillion dollars in a bailout, which should have shocked a lot
    of people and should have been headline news around this
    country.
        Just this week, the Federal Open Market Committee voted
    unanimously to extend its program to purchase $1.2 trillion
    worth of mortgage-backed securities and up to $200 billion of
    agency debt through the first quarter of next year. In fact,
    before our eyes, we are seeing what Chairman Frank said last
    year when we said, with President Obama and a strong Democratic
    Senate, we can get the Federal Government back in the housing
    business. We are seeing that happen. He was right.
        In fact, if we are talking about the Federal Reserve, they
    are the biggest holder of U.S. Government debt--not private
    companies, not China, not the Middle East. It is the Federal
    Reserve. They are buying, according to the Wall Street Journal,
    50 percent of all new treasuries issued by the Treasury. That
    was in the second quarter. And they buy a good portion of the
    GSE bonds that Fannie Mae and Freddie Mac issued.
        So you have one government agency buying another government
    agency's debt. We have shifted debt from the private sector
    onto the U.S. Government taxpayers' back. And now we have one
    government agency, in a way, bailing out another government
    agency. It is a classic example of the Fed bailing out the
    Federal Reserve, the Fannie bailing out the Treasury.
        And, you know, you wonder who is going to bail out the U.S.
    Government. And I think the taxpayers have figured out it is
    we, the taxpayers. And that is one reason why we desperately
    need this legislation.
        The Chairman. Let me just say to the gentleman, the
    Minority has now used 8 minutes and 20 seconds.
        Mr. Bachus. I yield back.
        The Chairman. You had other members who wanted to do 1-
    minutes. And we were asked, including by Dr. Paul, to get to
    the testimony.
        Mr. Bachus. Mr. Chairman, we did--like, Mr. Watt went
    over--
        The Chairman. No. We have 15 minutes on each side.
        Mr. Bachus. Okay.
        The Chairman. I understand that. But you had more people
    who wanted to speak. Mr. Watt didn't go over--we will not use
    up our full 15 minutes. You had a list of 8 people who wanted 1
    minute. We are going to run out of time, and Mr. Paul did ask--
        Mr. Bachus. No, you are right. I yield back.
        The Chairman. I now recognize the gentleman from North
    Carolina for a unanimous consent request.
        Mr. Watt. Thank you, Mr. Chairman.
        In your opening statement, Mr. Chairman, you mentioned
    several aspects in which the Fed is making an effort to be
    transparent. I wanted to ask unanimous consent to introduce,
    first, a Federal Open Markets Committee press release, which is
    an example of something that comes out immediately after the
    Federal Open Market Committee meets.
        Second, the Federal Open Market Committee's minutes, a
    sample that comes out a few weeks after the Federal Open Market
    Committee meets.
        And, third, the Federal monthly liquidity and balance sheet
    report that comes out monthly, showing the actual disposition
    of the various funds that they--
        The Chairman. Is there any objection?
        Without objection, it is so ordered.
        And we will now take several of the Republican members, who
    are down for 1 minute. The gentleman from Delaware was down for
    1 minute.
        Mr. Castle. Thank you, Mr. Chairman.
        We are rapidly approaching the 1-year anniversary of the
    enactment of the Emergency Economic Stabilization Act, the bill
    that authorized the Troubled Asset Relief Program, TARP, as we
    know it.
        Since that time, the House Financial Services Committee has
    held multiple oversight hearings, received updates from the
    Congressional Oversight Panel, read the reports of the Special
    Inspector General for TARP, and been regularly updated on the
    $700 billion taxpayer-funded stabilization program by the
    Government Accountability Office, GAO.
        So why haven't we taken any of these rigorous oversight and
    accountability steps in tracking the $2 trillion in assistance
    provided by the Federal Reserve in response to the economic
    crisis? We know about the statutory restrictions to protect its
    independence, which excludes certain oversight mechanisms. But
    I believe that the advancing of money here has gone far beyond
    that.
        While I understand the need of the Federal Reserve to
    maintain that relative independence and some level of
    confidentiality to maintain its policies, we must allow the GAO
    to provide independent analysis of its actions.
        It is clear to me and over 290 of my congressional
    colleagues who also cosponsor H.R. 1207 that statutory changes
    are needed to further scrutinize the activities of the Federal
    Reserve. We must have a clear understanding of how Federal
    funds have been utilized, whether successfully or
    unsuccessfully.
        I yield back the balance of my time.
        The Chairman. The gentleman from California, Mr. Royce, is
    recognized for 1 minute.
        Mr. Royce. Thank you, Mr. Chairman.
        I am one of the House Members who signed on to the Federal
    Reserve Transparency Act. I signed not because I would like to
    see the Federal Reserve brought closer to the political process
    but because I deeply am concerned about the massive expansion
    of this so-called safety net under our financial system.
        If we go back to 1999, 45 percent of the liabilities in our
    financial system were under this net, according to the Federal
    Reserve. Today, that number is far greater. And whether or not
    you agree with the steps taken in recent months to prop up
    financial institutions, it is apparent that the Federal Reserve
    became the path of least resistance for many of these bailouts.
        As we look toward reforming the financial system, it is
    essential that we adequately understand the extent to which the
    Federal Government and the Federal Reserve have enhanced that
    safety net and exacerbated the potential moral-hazard problem
    that comes with it, a moral-hazard problem that, I would argue,
    had a lot to do with the original financial crisis. We are now
    repeating it.
        Thank you, Mr. Chairman. I yield back.
        The Chairman. The gentlewoman from Illinois, Ms. Biggert,
    for 1 minute.
        Mrs. Biggert. Thank you, Mr. Chairman, and thank you for
    holding this hearing today. I also want to thank our colleague,
    Dr. Paul, for introducing H.R. 1207 and for his leadership on
    this issue.
        I cosponsored the bill. I heard from a lot of my
    constituents about this. And, in addition, I think it is
    important that the American taxpayers know how and why the Fed
    issues over $2 trillion to stabilize certain financial
    institutions in order to stabilize the markets.
        To restore public confidence in our financial markets and
    our government, and for the benefit of consumers, taxpayers,
    and our economy, we must increase transparency as well as enact
    significant reforms to our regulatory structure. H.R. 1207 is
    one piece of that.
        I look forward to today's hearing and yield back the
    balance of my time.
        The Chairman. The gentleman from Massachusetts, Mr. Lynch,
    for 2\1/2\ minutes.
        Mr. Lynch. Thank you, Mr. Chairman.
        This hearing is a long time coming, and I appreciate the
    gentleman from Texas sponsoring this bill, the Federal Reserve
    Transparency Act of 2009.
        I would like to welcome our witnesses and thank them for
    helping the committee with its work.
        Not surprisingly, Mr. Paul's bill has received an
    increasing amount of attention over the last 18 months, as the
    economy has worsened and the Federal Reserve began a series of
    extraordinary measures to stabilize the markets. I think all of
    our offices received calls regarding this bill, very many in my
    district in support. And I do welcome the opportunity to
    discuss the legislation further.
        The crash of Lehman Brothers last fall demonstrated the
    complexities and interconnectedness of the market, an issue
    that this committee continues to address.
        The Fed enjoys a number of privileges that extend to no
    other agency in Washington. The Fed raises its own revenue, it
    drafts its own operating budget, and it submits nothing to
    Congress. There is an obligation on the Fed Chairman to appear
    a couple times a year, under Humphrey-Hawkins, but the
    information there is just to tell us what the range of targets
    are for monetary growth. And I think there has been a general
    secrecy around the Fed that has heightened the anxiety of the
    American people on how the Fed is handling its responsibility.
        Many believe more can be done. I know that Chairman
    Bernanke has tried to bring a little bit more transparency in
    recent months, but I think people believe more can be done,
    especially as this committee considers increasing the Fed's
    responsibility as a systemic regulator.
        I look forward to the testimony of our witnesses to further
    debate on this issue. And I yield back the balance of my time.
    Thank you, Mr. Chairman.
        The Chairman. The gentleman saved us 43 seconds. And now I
    recognize the gentleman from Texas, Mr. Hensarling, for 1
    minute.
        Mr. Hensarling. Thank you, Mr. Chairman.
        To borrow from an old ad campaign, this is not your
    father's Federal Reserve. We have a Federal Reserve that has
    now promulgated rules on credit cards, mortgages, and executive
    compensation, not to mention helping to create trillions of
    dollars of taxpayer liability exposure.
        Clearly, exigent powers for the Federal Reserve are
    important, but they must be constrained. There is a huge
    difference between providing emergency liquidity facilities
    broadly in our economy and becoming an institution for serial
    institutionalized bailouts.
        Independence of the Fed remains a very important issue, but
    that needs to be in the context of a Federal Reserve that tends
    to monetary policy, preferably tied to inflation targets.
        I am very happy to cosponsor Dr. Paul's bill. I appreciate
    his leadership. I think it is the first step to helping create
    more transparency and more accountability as we move forward on
    this important issue.
        And I yield back the balance of my time.
        The Chairman. The gentleman from New Jersey for 1 minute.
        Mr. Garrett. I thank the chairman for holding this hearing
    after all these many years and Dr. Paul for introducing this
    legislation.
        Preserving the Federal Reserve's independence in conducting
    its monetary policy is cited by Mr. Alvarez in his testimony
    and by others as a reason to oppose the Federal Reserve
    Transparency Act. But, you know, Allan Meltzer, who is one of
    the most prominent academic experts on Fed policy in history,
    recently declined to join others in signing a petition to
    preserve the central bank's independence because, he said,
    ``The Fed is rarely independent, and it strikes me that being
    independent is very unlikely in this current environment.''
        According to the Wall Street Journal article, he went on to
    explain that ``History is replete in instances where the Fed
    bended to political pressure, keeping interest rates low in the
    1930's and 1940's to help finance the New Deal and to keep them
    low again in the 1960's to finance the Great Society, leading
    of course to inflation to follow.''
        So I am hoping that we can explore, at this time, the
    premise some more at today's hearing of how independent is the
    Fed, really. Because if history shows it has never truly been
    independent, then there is no independence to protect, which
    leads us to ask, what is it really that the people are
    interested in protecting?
        Thank you.
        The Chairman. The gentleman from Georgia is recognized for
    1 minute.
        Mr. Price. Thank you, Mr. Chairman.
        As cosponsor of this legislation, I want to applaud
    Representative Paul for his dedication and oversight for
    oversight and accountability of the Federal Reserve.
        The Fed has truly shown a remarkable willingness to
    initiate unprecedented intervention into financial markets.
    These actions have ballooned the Fed's balance sheet to over
    $2.1 trillion. Most recently, it has been reported that the Fed
    is currently drafting a proposal to regulate compensation
    arrangements for private-sector companies, including those that
    have received no Federal dollars.
        So expanding their balance sheet, increasing regulatory
    authority, setting private-sector compensation has left many of
    us wondering, where does the Fed find its authority, and
    shouldn't there be greater oversight?
        Clearly, more transparency is needed to get at the heart of
    the Federal Reserve. Representative Paul's bill is an important
    first step in reining in what has become an increasingly
    activist governmental body.
        I want to commend Mr. Paul, and I call on the chairman of
    the committee to hold more frequent and regular hearings with
    the Fed Chair to shed further light and give greater
    opportunity for congressional oversight.
        And I yield back.
        The Chairman. The ranking member and I have agreed to an
    additional minute-and-a-half on each side so we will be able to
    accommodate everybody who is here.
        And now Mr. Grayson is recognized for 1 minute.
        Mr. Grayson. Thank you, Mr. Chairman.
        One of the most important elements of the bill is that it
    has 292 cosponsors and represents a new model of bipartisanship
    that I hope will take hold all through Congress. This is not a
    Republican issue; this is not a Democratic issue. This is a
    bill that was introduced originally in 1983, when I was still
    in school, and now is finally coming to fruition. It is long
    overdue.
        I think we all can agree, left and right, middle, center,
    up, down, whatever your political persuasion, that the Fed
    needs to be accountable to the American people, and that is
    exactly what this bill accomplishes.
        Thank you, Mr. Chairman.
        The Chairman. The gentlewoman from Minnesota for 1 minute.
        Mrs. Bachmann. Thank you, Mr. Chairman, and Mr. Paul.
        The Federal Reserve is an institution known as much for the
    broad powers over the financial marketplace as for its sense of
    secrecy about its decision-making.
        Shining more light on the Fed's books gained a fresh head
    of steam after the Fed exercised its Section 13(3) powers to
    bail out Bear Stearns in March of 2007. This power allows the
    Fed to lend to anyone it wants in unusual and exigent
    circumstances. It also led to an initial $85 billion bailout of
    AIG that later rose to more than $150 billion.
        This plan promotes more accountability from the Fed by
    requiring that it obtain Treasury's approval to act under
    Section 13(3), and giving Congress the ability to disapprove of
    any action taken under that authority.
        Congress requires transparency of publicly-traded companies
    for its shareholders. Government should not be held to a lower
    standard vis-a-vis the taxpayers. The stake we hold in the Fed
    is just as real; it deserves just as much respect.
        Thank you, Mr. Chairman. I yield back.
        The Chairman. The gentlewoman from Kansas for 1 minute.
        Ms. Jenkins. Thank you, Mr. Chairman.
        Recently, we have seen the American people step up to
    express frustration: frustration with the increased size of
    government, frustration with debt, frustration with reckless
    spending, and now frustration with health care reform. They are
    demanding accountability out of their government officials, and
    I firmly believe our government works best when it is
    accountable. And to be held accountable, government must be
    open and transparent.
        The Federal Reserve has a duty, a duty to make economic
    decisions independent of politics. Yet, in the end, it must be,
    first and foremost, accountable. The Fed has recently taken
    small steps to increase transparency, but I am eager to hear
    today exactly what they are doing to ensure greater access and
    accountability to the folks back home.
        I yield back.
        The Chairman. And I will yield myself the final minute
    remaining on our side.
        First, the gentleman from Georgia puzzled me when said he
    called on me to have more hearings. We have regularly had
    hearings. We have had the Chairman here on several occasions.
    We have had other officials, the Vice Chairman. I am not aware
    of any request from the Minority to hold a hearing on the Fed
    that was not honored. And, in most cases, we didn't wait for
    those requests. There has been a continuous series of hearings,
    more, I believe, recently than ever before, with the Fed,
    although that is justified by the increased role the Fed has.
        Secondly, the gentleman from North Carolina raised the
    point about how to do this. There were some who said, ``Well,
    don't do this as part of overall reform. Do it as a
    standalone.'' And there was reference to Section 13(3). Well,
    there is nothing in this bill about Section 13(3). That doesn't
    mean the bill is wrong, but, in fact, the great power the Fed
    has, that it has had since 1932, to intervene in the economy,
    isn't touched by this bill. I think we should put constraints
    on 13(3); I plan to do it. That is why I think the gentleman
    from North Carolina is right when he said this should, I
    believe, be part of an overall approach.
        The time for opening statements has expired, as has
    probably the patience of the audience. They seem to have gone
    out together. So we will now hear from Mr. Alvarez.

       STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, BOARD OF
                GOVERNORS OF THE FEDERAL RESERVE SYSTEM

        Mr. Alvarez. Chairman Frank, Ranking Member Bachus,
    Congressman Paul, and other members of the committee, I
    appreciate the opportunity to testify on H.R. 1207, the Federal
    Reserve Transparency Act of 2009.
        The Federal Reserve is accountable to the Congress and the
    public and is committed to maximum transparency, consistent
    with the effective performance of our responsibilities.
        To facilitate that transparency and effective oversight, we
    provide the Congress and the public detailed information
    concerning the full range of our policy actions, operations,
    and financial accounts. Federal Reserve officials testify
    frequently before the Congress on all aspects of the Federal
    Reserve's responsibilities and operations. And the Board's
    Chairman testifies and provides a special report to the
    Congress semiannually on the state of economy and on the
    Federal Reserve's actions to meet the monetary policy
    objectives that Congress has established.
        The Federal Open Market Committee releases a statement
    describing its monetary policy decisions immediately after each
    regularly scheduled meeting and publishes detailed minutes of
    each meeting 3 weeks later.
        In addition, the financial statements for the Federal
    Reserve System are audited annually by an independent public
    accounting firm and made available to the public. We also
    provide Congress a detailed annual report that reviews all
    aspects of the Federal Reserve's policy actions and operations
    during the year.
        Now, we recognize that the extraordinary actions that the
    Federal Reserve has taken during the financial crisis to
    promote financial stability and implement monetary policy must
    be accompanied by additional transparency. For these reasons,
    we have substantially increased both the type and amount of
    information that we disclose concerning our liquidity and asset
    purchase programs. We have added significant new information to
    the balance sheets that we publish each week and have created a
    special section of the Board's Web site that offers
    considerable new and detailed information about our policy
    programs and financial activities.
        We have initiated a detailed monthly report to the Congress
    on our liquidity programs and balance sheet that includes
    information on the size of each facility, the collateral
    supporting the facility, and the types of borrowers. We
    continue to explore whether additional information can be
    provided without jeopardizing the effectiveness of these
    programs.
        The Federal Reserve also is subject to audits by the GAO
    across a wide range of our responsibilities. This year alone,
    the GAO has completed 14 audits of the Federal Reserve's
    activities and has an additional 14 audits pending. The GAO's
    audits have included assessments of our consolidated
    supervision function, our oversight and operation of payment
    systems, and our implementation and enforcement of consumer
    protection laws.
        Congress also recently granted the GAO authority to audit
    the emergency credit facilities that the Federal Reserve has
    provided to single and specific companies under Section 13(3)
    of the Federal Reserve Act and clarified the GAO's authority to
    audit the Term Asset-Backed Securities Loan Facility in
    conjunction with its review of Treasury's TARP program.
        However, Congress purposely and for good reason excluded
    monetary policy matters, including open market and discount
    window operations, from GAO review. Considerable experience
    shows that monetary policy independence, within a framework of
    legislatively established objectives and public accountability,
    tends to yield a monetary policy that best promotes price
    stability and economic growth.
        H.R. 1207 would subject monetary policy matters to GAO
    audit. Financial market participants likely would see this as a
    substantial erosion of the Federal Reserve's monetary policy
    independence. This would tend to undermine public and investor
    confidence in monetary policy by raising concerns that monetary
    policy judgments would become subject to political
    considerations. These concerns likely would increase inflation
    fears and market interest rates and ultimately damage economic
    stability and job creation.
        The bill would also likely chill the unfettered and wide-
    ranging internal debates that are essential for identifying and
    implementing the best policy options.
        In addition, enactment of the bill could reduce the
    effectiveness of our discount window and liquidity programs by
    increasing potential borrowers' fear of stigma or adverse
    reactions from participating in these programs.
        We recognize that there may be ways to further enhance the
    review of the operational integrity of our market credit
    facilities without endangering the Federal Reserve's monetary
    policy independence. We will continue to explore ways to
    improve our transparency and will continue to work with this
    committee and Congress to ensure that our credit facilities are
    operated in a way that promotes the highest standards of
    accountability, stewardship, and policy effectiveness.
        Thank you, and I look forward to any questions you may
    have.
        [The prepared statement of Mr. Alvarez can be found on page
    60 of the appendix.]
        The Chairman. Thank you, Mr. Alvarez.
        First, I do want to note, there was some reference to the
    recent announcement by the Federal Reserve that it plans to put
    out rules regarding the compensation of executives. And I want
    to make it clear, the majority in the House surely welcomes
    that, because the majority in the House voted just before we
    recessed for the summer to direct bank regulatory and financial
    regulatory agencies, including the SEC, to do exactly what you
    are proposing. So there is a great complementarity here.
        In fact, some people raised the question, when the Federal
    Reserve made that statement, that it might not have the
    statutory authority. In fact, the bill that we passed in August
    through the House anticipates that and would clearly confer
    that statutory authority. And I am confident that is going to
    be part of what we ultimately do in the regulatory reform
    package.
        And, in addition, one of the other concerns was, well, if
    the Federal Reserve does it, it covers only those institutions
    which it regulates; what about the others? Once again, the bill
    that we did anticipates that argument because it would provide
    uniformity. And I would hope, because I expect that bill to
    become law, that we would then see and we will encourage and
    maybe require the regulatory agencies of jurisdiction to come
    together so they have common rules.
        I do want to say that this is a case of the Federal
    Reserve, I believe, responding to an important national view
    and, in particular, to an action that this House already voted
    for by a majority in August.
        Now, the question of independence has come up, and people
    have talked about it, and there has been a lot of concern about
    13(3) and independence. And I think we ought to acknowledge
    this. When the Federal Reserve decided to exercise its
    authority in 2008 under Section 13(3), and the first major
    intervention, as I recall, was AIG, but also, I guess, Bear
    Stearns--Bear Stearns and AIG--were there consultations with
    the Bush Administration? Did you do that over their objection,
    at their direction, with their concurrence? How would you
    describe the conversations between the other Bush
    Administration officials--of course, Mr. Bush appointed Mr.
    Bernanke initially--but how would you describe the relationship
    between the Bush Administration and the Federal Reserve with
    regard to those uses of 13(3), which began this regime of
    greater use of 13(3) by a significant amount?
        Mr. Alvarez. Well, Mr. Chairman, we had quite a few
    consultations with Secretary Paulson, the Secretary of the
    Treasury at the time. And we used our authority, with the full
    support of the Treasury and the Administration, in the various
    aspects of the crisis.
        The Chairman. No, I think that is important to get in the
    record, probably because people have said, ``Well, you are
    talking about an independence that you don't have.'' What would
    you say to the argument, well, you did this--and I acknowledge
    that seems to me to have been the case, that you took these
    extraordinary steps using 13(3), with the full support of the
    Bush Administration, maybe even they were urging in some ways.
    Did you feel that compromised your independence?
        Mr. Alvarez. The discussion about independence is focused
    on our monetary policy actions. The 13(3) authority that we
    exercised for Bear Stearns and AIG, for even Citigroup and then
    Bank of America, those exercises of authority, we think, are
    appropriately done in full consultation--
        The Chairman. All right. Well, that is a very important
    distinction to be made. And so, obviously, there will be no
    problem at all and no resistance. Although, obviously, this is
    going to be written here and not at the Federal Reserve, this
    bill. But there is no resistance to full audit of the use of
    the 13(3) policy. You say this invigoration of Section 13(3),
    the power to make all these loans, came with the full support
    of and in coordination with the Bush Administration.
        Mr. Alvarez. And that is right, sir. We do not object to
    GAO audits of those single and specific--
        The Chairman. Now, on the window and open market, etc., let
    me make a distinction. I do believe it is important that there
    be a time lag before information is released about who bought
    what and who went where so that this does not become
    information on which people act in the market.
        I would say, however, that is different from saying that,
    after a suitable time period, so that there won't be this
    market effect, you don't have a right to go to a Federal
    agency, borrow money, and keep it secret forever. So I do
    think, with regard to this--I also would say, by the way, most
    people figured out who was in trouble and who wasn't, even
    without that.
        But could we maintain that distinction--that is, a time
    period so that we maintain market integrity but not ultimate
    secrecy about who benefited from this?
        Mr. Alvarez. You are raising a question, I think--
        The Chairman. Is that a distinction?
        Mr. Alvarez. That is--
        The Chairman. Whether you approve of it or not, is that
    something that we could work out statutorily?
        Mr. Alvarez. That is something that we are giving serious
    consideration to, and we would be happy to work with you on it.
        The Chairman. I will be asking you to help us put that
    concept into statute.
        Mr. Bachus?
        Mr. Bachus. Thank you, Mr. Chairman.
        Mr. Chairman, before I yield the balance of my time to Dr.
    Paul, I do want to point out that in July, the Republican
    Party, or the Republican conference, introduced and members of
    the Financial Services Republican membership introduced H.R.
    3310. Within that bill is actually Mr. Paul's legislation in
    its entirety.
        The chairman had, I think rightly, suggested that any
    reform proposal ought to include an audit of the Federal
    Reserve and also mention Section 13(3). That also, although it
    is not in Dr. Paul's bill, it is in the Republican alternative;
    we do limit Section 13(3).
        So, for the record, I would like to introduce the
    provisions of H.R. 3310 and the Republican--
        The Chairman. Without objection, it is so ordered.
        And would the gentleman yield to me for 10 seconds?
        Mr. Bachus. Yes.
        The Chairman. Yes, I appreciate that. I do think that is
    further argument for doing this comprehensively.
        Mr. Bachus. Yes.
        The Chairman. I simply meant that is, I think, part of the
    overall approach.
        Mr. Bachus. And I was just responding to--there was some
    mention that 13(3) was not addressed. And, in fact, we do
    address--
        The Chairman. Only in this particular bill.
        Mr. Bachus. Yes, but we do, in the Republican alternative,
    we do strike that.
        And, in fact, I would invite anyone interested in, again,
    looking at our Republican plan for reforming the financial
    regulatory system. Number four, which we devote quite a bit of
    time to, is fundamental reform of the Federal Reserve. And I
    would like to introduce that also.
        The Chairman. Without objection, it is so ordered.
        Let me get general leave now for any member to introduce,
    or any witness, any material he or she would like to put in the
    record.
        Without objection, it is so ordered.
        The gentleman from Texas is now recognized for 2 minutes
    and 50 seconds.
        Dr. Paul. Thank you.
        Mr. Alvarez, on your first page, you mention--
        The Chairman. Let me ask the gentleman to yield. If the
    gentleman would like, there is 2 minutes and 50 seconds left
    from the ranking member, and if he wants his own 5 minutes, you
    can just do the 7:50 right now, if you would like.
        Dr. Paul. I think I will take the 2\1/2\ now and see how
    things go.
        The Chairman. Put it back to 2:50.
        Dr. Paul. Thank you.
        You mentioned, which has been mentioned quite frequently
    already, about the independence of the Fed. But, on the bottom
    of that first page, you talk about the public interest. You
    imply that the independence of the Fed is important to protect
    the private interest.
        And I would like to challenge you on that, because public
    interest is not easily definable. And I would suggest that
    maybe we have something to do with protecting the public
    interest too, maybe that is what we are elected for. And I
    wouldn't brag about our ability and our record, but I still
    believe that we have tremendous responsibility to protect the
    public.
        And this idea that a group of individuals, 12 individuals,
    who work behind the scenes who want more secrecy and less
    transparency, how did this come about where you assume that you
    are in charge of the public interest? Could you explain that to
    me?
        Mr. Alvarez. Congressman, I don't think we are saying that
    we are in charge of the public interest in a way that excludes
    Congress or anyone else. All government agencies have to act
    and do their best to act in the public interest, as within the
    constraints that Congress has set out.
        The concern that we have is that monetary policy, to be
    effective, has to be--and this is a matter that has been
    studied in a variety of contexts across a variety of schemes in
    the world--in order to be most effective, has to be as free as
    possible from political considerations.
        The GAO audits, as Congressman Watt and others have pointed
    out, are not audits in the sense that a CPA or an accountant
    would conduct an audit. They are really policy reviews. They
    are reviews that involve, oftentimes, conducting interviews or
    depositions of participants, looking at records, coming to an
    independent policy judgment, and publishing that policy
    judgment.
        And we are concerned that would undermine the ability of
    the markets to understand the Federal Reserve's action, the
    policy actions, to believe that those actions are independent
    and not being influenced by the GAO and that Congress is not
    trying through the GAO to direct monetary policy. That would
    make our ability to implement the policy, carry out the duties
    Congress has given us, that much more difficult.
        Dr. Paul. I only have a few seconds left, but if you could
    answer rather quickly, you don't want us to review the monetary
    policy because it might be damaging, but exactly what
    information is it that you don't want us to have? That is what
    a lot of people ask, and they want to know exactly what it is.
        I am sorry, but I guess my time--
        The Chairman. Well, you can borrow from any future time.
        Dr. Paul. Okay.
        The Chairman. I think we will lend the gentleman the time.
    Okay, let him answer it.
        Mr. Alvarez. We provide substantial information to the
    Congress to allow it to oversee our facilities, information
    about the collateral, about the terms and conditions, about the
    types--
        The Chairman. Mr. Alvarez, I want to move this along. The
    question was, what are the types, obviously not the specific
    information, but what types of information do you think would
    be damaging if they were revealed?
        Mr. Alvarez. Our concern about the audits of monetary
    policy are about the involvement of GAO. It is not about the
    types--
        The Chairman. No, Mr. Alvarez, that is not--the question
    is, are there types of information about monetary policy that
    you think would be damaging to reveal?
        Mr. Alvarez. No. I think the issue is about the GAO's
    involvement in the second-guessing about monetary policy. It is
    about their conclusions and about their review. It is not about
    the types of information. They have made a lot of that
    information available already to the public.
        The Chairman. All right. I think that is an adequate answer
    to the gentleman's question.
        Dr. Paul. Yes, and we can go on.
        The Chairman. Yes. The gentleman from North Carolina.
        Mr. Watt. Thank you, Mr. Chairman. I would just add to that
    from the discussion I have had with the Fed, it has to do with
    the ability of people to sit in the room and discuss something
    without having it appear the next day or being second-guessed
    the next day also. Let me do a couple of things in the minutes
    that I have. Mr. Paul has a devoted follower either in or near
    my congressional district named Brian D'Amico who regularly
    calls me about this. And one of the questions he has asked me
    about is the question that Mr. Castle raised in his opening
    statement. I just wanted--and I am not a high tech person, so I
    am going to do this at some risk.
        There is a Web site in which all of these reports about the
    various funds that the Fed has been administering under the
    emergency authority dealt with in some detail on Pages 1
    through 3 on this report, on pages 16 through 22 of the report
    that I put in under unanimous consent. But that information is
    also available on the Fed's Web site, http://
    www.FederalReserve.gov/monetarypolicy/bst--Fedfinancial.htm. I
    probably got something wrong there. But for Mr. D'Amico, Mr.
    Castle, the world out there, please go and look at what is
    already up on the Web site before we continue to second-guess
    what we ought to be demanding that they put up. Second, I am
    delighted to hear the emerging consensus on both sides of the
    aisle that this ought to be done as part of reg form. Dr. Paul
    and I had that discussion a number of times and I feel strongly
    that to do this before we know what the ultimate authority of
    the Fed will be under regulatory restructuring is just an
    invitation to go back and have to do it again at some
    subsequent point and we ought to do it as part of the reg
    reform process.
        Finally, Mr. Alvarez, you are the General Counsel, so I
    think you would be in probably as good a position--you started
    to address this issue in your response to Mr. Paul. I addressed
    it generally in my opening statement, the difference between a
    regular CPA audit in the public context and the definition or
    coverage of a GAO audit as we think of it in the government
    context. I presume a GAO audit is not just a report of the
    numbers. Talk to us about what a GAO audit authorizes the GAO
    to do.
        Mr. Alvarez. Thank you very much, Congressman. You are
    exactly right, our financial statements are audited by an
    actual accounting firm in the traditional sense of audit that
    people think about, checking the numbers and making sure they
    are accurate. And that we make public on an annual basis. The
    GAO looks at discreet areas or broad areas. It has access to
    all the information of the Agency and then it formulates
    suggestions on how the Agency should develop policy. It may
    make suggestions about the very policy itself, and provide that
    information to the Agency. It is not directed at just verifying
    what has occurred or verifying the accuracy of statements. It
    really is meant to be more a policy guide for the agencies. So
    it does involve itself in making recommendations about policy
    decisions.
        Mr. Watt. I take it if we did--if we didn't clarify this or
    be more specific about it, we might--Mr. Paul might, 5 years
    from now, be requesting a GAO audit of the GAO in his comments
    because it has pretty broad authority to get into policy
    decisions, things that are not just numbers crunching. That is
    the point you are making?
        Mr. Alvarez. That is exactly right.
        The Chairman. We have one maybe 15-minute vote, so we are
    going to break right now. There is a possible second vote. The
    gentleman from Texas and I do not plan to stick around for the
    instruction motion vote over there. So we are going to go vote
    on the rule and come right back and continue this because of
    the importance for the day. So we are in recess, but not for
    more than 10 or 15 minutes, as long as it will take Mr. Paul
    and I to go over and vote and come right back.
        [recess]
        The Chairman. The hearing will be convened and the
    gentleman from Texas is recognized for 5 minutes.
        Mr. Neugebauer. Mr. Alvarez, in your testimony--and you
    made this point several times, you said we want the American
    people to have as much information about what we are doing
    that--to the extent that it doesn't jeopardize the performance
    of our duties. And here is the question I have: If I go to the
    doctor and the doctor says I am going to review your test, he
    reviews my test and he says I am going to tell you everything I
    think you need to know, I am just not going to tell you
    everything I know. I immediately become interested in what he
    is not telling me than more interested in what he is telling
    me. What are those things that would keep you from being able
    to do your duties that you shouldn't tell us?
        Mr. Alvarez. Very good question, Congressman. I think this
    is more akin to what should your doctor tell the public about
    your health, not about what the doctor should tell you. I think
    our concern is not about hiding information; it is about
    maintaining the integrity of the process for making monetary
    policy. Monetary policy involves, as does congressional policy
    development in other areas, a lot of discussion and debate
    about ideas that may work, ideas that won't work, about data
    that may be meaningful, data that may not be meaningful. It
    requires an unfettered and broad discussion. That discussion--
    that process is what we seek to make sure is effective. Also,
    monetary policy depends very much on the market's understanding
    of whether the Federal Reserve will move in a particular
    direction, how it will move in a direction, whether it will
    stay in that direction and when it will change directions.
        If it looks like the Federal Reserve is changing directions
    because a statement, a policy review by another agency is
    influencing the Federal Reserve's decision not because the
    Federal Reserve is moving based on data, but is, in fact,
    responding to a GAO policy recommendation, then the integrity
    of the process will be undermined, confidence that the Federal
    Reserve will move in the direction that is best for the economy
    will be undermined and we won't be able to carry out our job as
    well. That is what we are concerned about.
        Mr. Neugebauer. I think one of the things that the American
    people are concerned about is that, one, you have grown your
    balance sheet to over $2 trillion and that ultimately they are
    on the hook for the activities of the Federal Reserve. The
    other piece is the Treasury recently has made a recommendation
    that now we make the--take additional responsibilities,
    additional authority, even more broad authority than maybe some
    of the authority you already have to be the systemic risk
    regulator. And yet we have the Fed coming to us and saying,
    yes, we aren't going to have full disclosure, we are going to
    take on these responsibilities. And I think they are concerned
    about that. Think about, for example, the currency swaps and
    international currency transactions that the Fed is engaged in,
    and we don't know all of the details of those transactions. Are
    we requiring these countries actually to turn around and buy
    treasuries with some of these facilities in a way to prop up
    our unfettered spending in this country where we are spending a
    dollar and borrowing 50 cents for every dollar we spend.
        The American people are extremely--I don't know if you all
    are listening over there or not, but the American people are
    extremely concerned about the activities that are going on in
    government and also they lump you--whether you want to be
    independent or not, you are lumped in as part of government. So
    I think you all are going to have to do a better job of
    articulating. Because when you look at the--for example, when
    some of these financial institutions started participating in
    some of these credit facilities, it actually brought confidence
    to the market.
        And so the fact that a large bank is now coming to the
    Federal Reserve window and you are completing that transaction
    should give the market more confidence that the financial
    institution possibly is in good condition. Or if you were
    turning them away, it might have a greater impact. I am having
    a hard time understanding the transparency argument.
        Mr. Alvarez. Congressman, if I could respond briefly to
    several of those points. First of all, on the foreign currency
    swaps, we provide very detailed information about those swaps
    on our balance sheet and in the monthly report that Congressman
    Watt referenced. For example, we list the countries that we
    have the swaps with. We list the amount outstanding. We list
    the terms and conditions of those swaps so that the public will
    understand what the exposure is of the Federal Reserve. That is
    all explained in our monthly reports. As the amount drawn in
    those swaps change, we revise that information to make it
    available to the public. So that kind of information is
    precisely what we have tried to put together on the Web site.
    Also you reference the size of our balance sheet, $2 trillion.
    Most of that is in the form of U.S. Government--ownership of
    U.S. Government securities and agency guaranteed securities.
    That, again, is listed in detail on our balance sheet with the
    maturities of those securities and a lot of other detailed
    information that should help give people confidence if they are
    able to spend the time to look through the information. With a
    complicated balance sheet, it can't be summed up in a couple of
    words, which makes it more difficult for us. That is why we put
    so much information on the Web site and in the monthly report.
        Mr. Watt. [presiding] The gentleman's time has expired. The
    gentleman from Kansas, Mr. Moore, is recognized for 5 minutes.
        Mr. Moore of Kansas. Thank you, Mr. Chairman. Mr. Alvarez,
    as we consider improving transparency and oversight of the Fed,
    I would like to better understand what risk U.S. taxpayers take
    on when the Federal Reserve lends money, especially under the
    authority granted the Fed via its 13.3 emergency powers. What
    collateral, if any, does the Fed require to protect against the
    risk of losses when extending credit and has the Federal
    Reserve lost money on its lending activity? Do you expect the
    Federal Reserve to lose money on any of its lending activity
    since the financial crisis last year, Mr. Alvarez?
        Mr. Alvarez. Congressman, as you pointed out, the lending
    that we do under Section 13.3 is secured. So we have collateral
    against that lending and we believe and our advisors who are
    monitoring these things and valuing the collateral on a regular
    basis continue to believe that we have very little exposure
    here and we expect to be fully repaid on the loans that we have
    made. The types of collateral that are supporting those
    lendings is described in the monthly report that we have. It
    varies by facility. Some facilities are backed by residential
    mortgage backed securities. Some are backed by other kinds of
    loans, agency security, a variety of things. But we explain
    that in the monthly report for each of the facilities.
        Mr. Moore of Kansas. Thank you, sir. As we consider
    improving the transparency of the Federal Reserve, I understand
    more than 385 prominent economists have signed a petition
    warning, ``the independence of U.S. monetary policy is at
    risk,'' because of efforts to audit the Federal Reserve's
    monetary policy activity. How would you respond to those
    economists?
        Mr. Alvarez. We believe that monetary policy must be done
    in an independent manner and believe that it is most effective
    when the Federal Reserve is able to have its unfettered debate
    and issue its policy decisions without second-guessing, without
    competing interests in communicating those policies to the
    public. So, in general, we agree.
        Mr. Moore of Kansas. And finally, Mr. Alvarez, if H.R. 1207
    was signed into law by the President today, what effect might
    that have on the economy and financial stability, sir?
        Mr. Alvarez. If the bill were passed today, the GAO would
    be required to do an audit immediately of our monetary policy
    positions. We are concerned that would, as I mentioned in the
    testimony, cause the markets and the public to lose confidence
    in the independence of the judgments of the Federal Reserve,
    there would be confusion about the communication about the
    forward actions of monetary policy, the forward path of
    monetary policy, and we are concerned that would make our
    ability to implement policy that would reach maximum employment
    and price stability much more difficult, leading potentially to
    higher interest rates before that is appropriate and in fact
    higher interest rates as a general matter.
        Mr. Moore of Kansas. Thank you, sir. Mr. Chairman, I yield
    back.
        Mr. Watt. I thank the gentleman. Mr. Castle from Delaware
    is recognized for 5 minutes.
        Mr. Castle. Thank you, Mr. Watt, Mr. Chairman. Just in
    reference to something you said earlier about a number--I and a
    couple of the others here mentioned information that we wanted.
    You indicated some of the information from the Federal Reserve
    is on their Web site, which may be accurate. But maybe I didn't
    articulate it very well. We are really trying to derive an
    independent analysis of what their information is, is what we
    are after. But to Mr. Alvarez, you mentioned a couple of
    things, and I tried to find it in your written testimony and I
    couldn't, so I don't have it exactly. I may be not summarizing
    quite correctly. Correct me if that is the case. You indicated
    something to the effect of you are--you, the Federal Reserve,
    are looking at additional information that you could consider
    releasing without jeopardizing your programs, those are my
    words and then later on you indicate in your testimony you are
    exploring ways to continue transparency or something to that
    effect. That I assume is beyond anything that has been done so
    far. Without going into any of the confidentialities of the
    Federal Reserve, can you share with us more specifically what
    those discussions consist of and what areas you are looking at
    and stuff?
        Mr. Alvarez. We have, as you have mentioned, increased
    substantially the amount of information that we make available
    as we have learned there is an appetite for that information.
    And we continue to take suggestions that come from hearings
    like this and from Congressmen to think of ways that we can be
    more--
        Mr. Castle. Is there any specific you can share with us
    that you are considering at this time beyond what you have
    already done.
        Mr. Alvarez. The chairman has mentioned we are actively
    considering how much information about borrowers we can make
    available and then we are exploring ways to allow review of the
    operational integrity of our implementation of monetary policy
    and whether that is possible. All areas that are still under
    thought, deep thought.
        Mr. Castle. You have heard the concerns of the various
    members on both sides with respect to everything that the
    Federal Reserve is doing, not that you don't do a good job, but
    the disclosure of information, etc. And we are concerned
    because ultimately any losses founded are going to be paid for
    by the taxpayers. And there seems to be some opposition to Dr.
    Paul's legislation as I understand it. So my question is, how
    much congressional oversight in the institution is appropriate?
    Or what aspects of Dr. Paul's legislation could the Federal
    Reserve live with if you are qualified to give us that response
    in terms of your knowledge?
        Mr. Alvarez. Let me point out that there is congressional
    oversight of our activity, including our monetary policy.
        Mr. Castle. Beyond that which is in the legislation.
        Mr. Alvarez. To the extent GAO is a part of that, that is
    an area where I think we would like to continue to work with
    the Congress. We don't have a specific idea at this point that
    I am prepared to put forward. But we would like to continue a
    discussion about whether there are ways that our implementation
    of policy or the operational integrity of our implementation
    might be something that could be reviewed.
        Mr. Castle. I am not an expert on all of your power, but
    this whole 13.3 business seems to be the area where all of this
    really started, it started for Dr. Paul a long time ago, but
    for a lot of the rest of us in terms of some of the lending and
    things you are doing. I would encourage you to continue your
    discussions of what you are willing to do in terms of
    transparency. I don't know if this legislation is going to be
    part of a greater bill or even have a chance for passage or
    whatever. But I think there is a need by the public to know
    this. I think the transparency helps in terms of support of
    your policies and to the dollar and the things that you are
    concerned about.
        And my hope is that this won't just go away, that the
    Federal Reserve will continue to look at it very seriously and
    understand that Members of Congress are very concerned about
    this as well, whether legislation passes or not. I yield back
    the balance of my time, Mr. Chairman.
        Mr. Watt. I thank the gentleman. Mr. Sherman from
    California is recognized for 5 minutes.
        Mr. Sherman. Nobody in my district thinks that the Fed has
    done such a wonderful job of running the economy that we should
    continue to cloak them in secrecy for the purpose of protecting
    them from second-guessing. Second-guessing, criticism is kind
    of what goes with being in government. Mr. Alvarez, we have
    talked a lot about 13.3. Let us say next year the entire
    Federal Reserve Board comes to you and says, look, Congress
    won't pass TARP 2, they won't pass any new legislation, the
    economy is going to melt down, we are going to be eating rat
    meat in the streets if you don't agree--because you are the
    General Counsel--that we can use Section 13.3 not just to
    invest in no risk or virtually no-risk instruments, but to
    invest in what we think is kind of the equivalent of a Single A
    instrument. Under those circumstances, would you agree that
    13.3 could be used to make a modest risk investments? The
    equivalent of Single A investments.
        Mr. Alvarez. Congressman, we don't make investments in that
    way. 13.3--under 13.3. 13.3 allows us to lend against
    collateral.
        Mr. Sherman. Many people use the word investment to
    describe a loan, but I will recast my question. To make loans
    that have the same risk as associated with a Single A bond.
        Mr. Alvarez. We do lend today against a whole variety of
    collateral that includes collateral that is a variety of
    ratings and some collateral that is not rated. So we lend
    against other loans for example that are not rated.
        Mr. Sherman. Sir, don't get tied up in my use of the term
    Single A. I am trying to use that to describe a level of risk.
    The question is, do you have to be absolutely fully secured or
    will you take the kinds of lesser security for which investors
    usually demand--private investors usually demand, 3, 4, 5
    percent above LIBOR?
        Mr. Alvarez. We are required by statute to be secured to
    our satisfaction. That is in 13.3. And so I would expect that
    we would be fully secure--
        Mr. Sherman. Sir, I am asking you what is legal.
        Mr. Alvarez. And I am explaining it.
        Mr. Sherman. You are telling me what is the practice. Is it
    illegal for your Board to make an investment that is not fully
    secured? And, excuse me, to make a loan that is not fully
    secured under a liberal interpretation of Section 13.3.
        Mr. Alvarez. It is required by statute that we be secured
    to the satisfaction of the lending reserve bank. The question
    you are asking is would it be possible for a reserve bank to
    feel secure without having 100 percent collateral. That has
    never been the case. So--
        Mr. Sherman. But you would not tell them that they did
    something illegal if they had something less than full
    security?
        Mr. Alvarez. The point of being secured is there would be a
    guaranteed repayment. So if there were other ways to guarantee
    repayment for example, sometimes credit is guaranteed by a
    third party. Sometimes--
        Mr. Sherman. Looking at the entire investment, there are
    many credit enhancements for investment. There is security and
    guarantees. And the market has a way of looking at the entire
    package. There are some loans that are LIBOR, there are some
    that are LIBOR plus 8. The language of finance allows me no
    words to describe except what a private investor would demand.
    I am asking you, would a significantly less than the kind of
    security that LIBOR or LIBOR plus 1 loans are made be legal
    under 13.3? And I am asking for a yes or no answer rather than
    a description of what you think they would do.
        Mr. Alvarez. It is not easy to give a yes or no answer to
    that question. That is a very nuanced question.
        Mr. Sherman. What you are saying is you might very well
    allow them to do the equivalent to buy a trillion dollars worth
    of junk bonds if they thought that was adequate security under
    the circumstances?
        Mr. Alvarez. If they thought they would be fully repaid by
    the loan in the loan that they made and it was secured, then,
    yes that would be the right answer.
        Mr. Sherman. Sir, when you invest--we deal with
    probabilities in finance. People who buy junk bonds expect to
    be repaid but they expect there is a risk. And you are saying
    that if they expect with a 51 per chance of being repaid--
        Mr. Alvarez. No, I am not. As we pointed out, this isn't
    about investing. It is about lending. So you have to be in a
    position to be fully repaid.
        Mr. Watt. The gentleman's time has expired. The gentleman
    from Texas, Mr. Paul.
        Dr. Paul. Thank you, Mr. Chairman. I am going to make a few
    comments. I am not going to ask specific questions. I would
    like to submit my questions in writing and then have a follow-
    up on that. But just a few comments. I wanted to talk about
    something you wrote on page 6 that said monetary policy
    independence prevents governments from succumbing to the
    temptation to use the Central Bank to fund budget deficits.
        I think we are already there and that is one of my big
    contentions about what is happening is that we have had license
    to spend. We borrowed and we don't have enough and then the
    Federal Reserve has been politicized to the point where they do
    accommodate us, whether it is for the funding of wars or for
    the welfare state, and that is why I think we have to
    eventually get to the bottom of this.
        The Federal Reserve was designed and their mandate was to
    make sure we have full employment, price stability and stable
    interest rates. In my lifetime, interest rates have been 21
    percent and less than 1 percent. So they failed there. A stable
    dollar and stable prices, well, we have continuous inflation.
    We have a 4 cent dollar that started off as a dollar in 1913.
    There was total failure there and we don't execute proper
    oversight. And it is our responsibility, and that is, of
    course, what I am arguing for. It is supposed to have full
    employment.
        When you look at the free market calculation of
    unemployment and even government statistic unemployment now is
    16 to 20 percent and in the Federal Reserve, they are arguing
    that they have to have more secrecy? This doesn't make any
    sense whatsoever. And more people. People are arguing we give
    more power to the Federal Reserve. What we need is more
    oversight and more transparency rather than more authority to
    the Federal Reserve. I mentioned earlier, and I think we still
    have to continue to think about it is: what example have we
    ever had where the GAO had an influence on policy?
        They are an independent agency of government and they just
    don't influence policy and I just don't believe that all of a
    sudden because we have an audit, we, as the Congress, are going
    to be looking over the shoulder. That is not the intent of the
    bill whatsoever. But I want to just mention very briefly about
    the foreign activity. You have explicitly said, don't touch the
    foreign activity. Well, the foreign activity is very important.
    Those are essentially treaties. You have agreements with other
    governments, other central banks, you commit funds which is
    indirect taxation because you don't tax the people for it, you
    print the money and you make these deals and promises to
    interfere in markets. You are involved in the President's
    Working Group on Financial Markets. This we all must find out
    about. We have to know about this. This is our responsibility
    because ultimately it leads to what the dollar is worth. The
    Federal Reserve, if anything, they should be protecting the
    value of the dollar, not deliberately destroying the value of
    the dollar. These are essentially treaties. The same way--when
    you create money out of thin air to subsidize something or bail
    somebody out, you have assumed the authorization and the
    appropriation process.
        We are derelict in our duties as Members of Congress to
    allow this to happen. It is a government unto itself. So I am
    going to follow up. I am going to put this in writing and
    hopefully I can get some answers. And I yield back the balance
    of my time.
        Mr. Watt. I thank the gentleman. The gentleman from Kansas
    City, Mr. Cleaver.
        Mr. Cleaver. Thank you, Mr. Chairman. I think Dr. Paul is
    obviously very well informed on this issue, maybe better than
    anyone else in Congress. But I recently had lunch with the
    Chair of the Kansas City Fed and we had a great--an interesting
    conversation. And I asked him as we sat in the dining room
    looking out at window, I said how many of the people do you
    think walking by here can make two sentences about what the Fed
    does. And he said none, which was the correct answer. One of
    the problems I think we have, and I am not sure that the Fed
    can solve it, is most people have no idea what the Fed does. In
    our system of government, that is always going to create
    problems.
        Now, I am not interested in defending the Fed. I will a
    little in just a minute. But when things happen like the bank
    bailout, that sours the opinions of the public and Congress
    because, sir, Mr. Alvarez, most people and probably most of
    them sitting behind you and most of them in my district believe
    that Congress took a specific vote to give money to the banks
    when, as you know, that did not happen. And so the transparency
    was missing. And I go home and people say, you guys voted to
    give the money to the banks, and when you say, we never took
    that vote, then the next question is, well, how did they get
    the money if you guys didn't vote to give it? And so I want you
    to explain to some of the folk in Kansas City and Independence
    how the banks got the money if this committee never recommended
    to the full House and then the Senate and then conference and
    then the President's signature.
        Mr. Alvarez. I believe, Congressman, you are speaking about
    the Troubled Asset Program, the TARP program.
        Mr. Cleaver. Yes, the Toxic Asset Removal Program. We were
    going to remove the toxic assets from the market so that people
    would have a greater deal of comfort in becoming actively again
    involved in the assets. We did not do what the Swedes did,
    which took--well, they took the assets, put them--separated
    them in what we call around here the bad bank. We didn't do
    that. But we did bail out the banks. At least that is what the
    public believes.
        Mr. Alvarez. Of course, the Treasury is in a better
    position than I am to discuss that program. But in summary--
        Mr. Cleaver. The Fed was involved.
        Mr. Alvarez. In summary, I think the expectation was that
    fund, those funds would be used to buy troubled assets. It
    became clear in October of 2007--or 2008 that it would take
    quite a long time to work through the details of an asset
    purchase program that would be effective, in fact Treasury and
    the FDIC continue to work on those details now. This is more
    than a year later. But it also became clear in October that the
    events of last fall, the economy was struggling tremendously.
    There were very many troubled institutions and confidence in
    the banking system needed to be restored. So Treasury took the
    decision that it was most effective and most necessary to use
    the funds there to inject capital into the banking system to
    restore confidence in the banking system.
        Now, the Treasury did that not by giving money away and I
    think that is an important point to make. It was investing the
    money in banking institutions and is that money being repaid.
    Repaid with profits and repaid with interest.
        Mr. Cleaver. Let me stop you there because I am going to
    turn on you. One of the problems is that the people don't know
    anything about what the Fed does. So hopefully, some of that
    can be laid out. Don't the funds that you earn return to the
    U.S. Treasury?
        Mr. Alvarez. Absolutely, sir. All the excess funds we earn
    beyond expenses are given over to the Treasury for use in
    dealing with the debt.
        Mr. Cleaver. Purchases, liquidity, loans?
        Mr. Alvarez. The interest on the loans we make. The
    interests we get on our assets.
        Mr. Watt. The gentleman's time has expired. The gentleman
    from New Jersey, Mr. Garrett. I apologize for cutting people
    off, but we are going to have votes and I am trying to get as
    many people in.
        Mr. Garrett. Thank you, Mr. Alvarez, for being here and for
    your testimony. So what I have actually learned here today here
    is that as we focus on this legislation in general, we can sort
    of break it down into two parts, the monetary policy issues
    that the Fed does and sort of like everything else. And then
    the everything else area, it sounds as though from the
    questions answered so far is that you have worked with the
    Administration, the Bush Administration and this Administration
    and some of those programs and you have appreciated the--
    working together on that and with some of the other policies,
    what have you.
        It seems as though the Fed has--I will use the word
    ``responded'' to some of the suggestions, or what have you, in
    these other areas to try to change their ways. For example, all
    the information on the Web sites and the audits and stuff like
    that is out there. And that is, as far as I am hearing, is an
    okay thing.
        And so the other--Chairman Frank--of course, that is with
    pressure if you will and encouragement to the Fed with regard
    to credit lending practices and that sort of thing and other
    people have as well. And the Fed might say has responded and
    the Fed has been active now in those areas as well, coming up
    with new guidelines on credit cards that sort of thing. So in
    that area, it looks as though the Fed is a little bit open to
    the idea of hearing what Congress has to say and respond. So it
    is really in the monetary policy area that this legislation is
    most concerned or troublesome if that is the right word. So one
    aspect of it is the disclosure requirements. What happens if
    the information is released too soon and what have you and you
    have your guidelines as to when currently you are released.
        But as I just re-read it as I sit here, the audit doesn't
    really say that if you have a meeting on Monday and they do the
    audit on Tuesday and, of course, it is going to take longer
    than that, that they are going to release all that information.
    It sounds like the audit is going to be one of these things is
    going to take forever to do and finally release it. So it is
    not like you are going to have that immediate release of
    information that you are concerned about, at least from this
    audit; is that correct?
        Mr. Alvarez. GAO is very responsive to the requests of
    Congress when Congress asks for audits in a specific period of
    time. My experience has been GAO tries its best to be
    responsive. So the timeframes would be--depend on what the
    audit is and what the--
        Mr. Garrett. In other words, your concern is you have a
    meeting on Monday--right now you release your minutes or what
    have you in 2 or 3 weeks. So unless the audit is done in a
    lesser period of time--would that be a provision that you would
    like to say that if we change the language and say that it has
    to be a few weeks after--
        Mr. Alvarez. It is not just about the timing. It is--
        Mr. Garrett. From that one point, would that solve it?
        Mr. Alvarez. I don't think so because the timing of the
    release of the audit--let us think of it this way: There are
    two parts to it. The audit itself would involve an intrusion
    into the process of making monetary policy by the GAO's
    involvement with the various members and looking at the
    discussions and then second-guessing those discussions in its
    report. Its report, whenever it comes out, is going to be a
    judgment about whether the Fed is doing the right thing, moving
    in the right direction on monetary policy, whether its basis
    for that--
        Mr. Garrett. Doesn't Congress already have the authority
    with all the reports and everything else and the chairman comes
    and testifies a couple of times a year? We have that authority
    right now to, if you will, second-guess what the Fed is doing?
    Don't we have that authority and the responsibility to second-
    guess Congress--second- guess the Fed at this point?
        Mr. Alvarez. I think what is different is the GAO
    establishes a much more intrusive reviewing process. It, as I
    mentioned, it will talk to all of the participants. It will
    look at all of the underlying data and make a more
    comprehensive evaluation.
        Mr. Garrett. So what you are saying--
        Mr. Alvarez. The statement at the end. So that review gives
    it a different aura in its report, a different kind of weight.
        Mr. Garrett. What that is basically saying is we can
    second-guess and give you our opinion just as long as we don't
    know what all the facts are; but if somebody else actually goes
    in and talks to the people and finds out what the facts are,
    then that report would have more weight because they were
    actually there. It sounds as though when we second-guess you,
    we are basing it on inadequate information and when the GAO
    does their inquiry, they are doing it with--last question.
        I only have 30 seconds. If the Governors are as independent
    as they hold themselves out to be, why would they be so
    subjected then to this pressure from someone second-guessing
    them and saying that we think you should have done ``X'' when
    they did ``Y?'' Are they like what Secretary Geithner says as
    far as all the other regulators? He says all the other
    regulators, banking regulators--I know you are not a regulator
    per se--but all the other banking regulators are only looking
    out for their own turf and their own self-interest and he
    doesn't hold regulators up very high.
        Is that the case with the Federal Governors or are they
    truly people who are independent and would not be subjected to
    the pressures of an audit, whatever the audit says? What camp
    do they fall into?
        Mr. Alvarez. They do their best right now in the atmosphere
    they are given, they are given an atmosphere where unfettered
    discussion is allowed and is actually valued. They would become
    much more worried about how their remarks would be viewed, what
    their thoughts would be and become much more careful about what
    they say. And that changes the debate, that changes the
    discussion, lowers the level of interaction.
        Mr. Garrett. I understand what you are saying.
        Mr. Watt. The gentleman's time has expired. The gentleman
    from Illinois, Mr. Foster.
        Mr. Foster. Thank you. I have just one question having to
    do with historical archiving of information. I can understand
    your motivation to not want deliberations, discussions with
    foreign regulator, this sort of thing. To become immediately
    part of the public debate and so on, I understand that line of
    reasoning. However, I think there is a real incentive and a
    good policy objective in having the eyes of history on the
    decisions that are being made.
        So for example, do you have policies on archiving
    correspondence, memos, e-mail and policy on the dates of which
    different classes of information get released?
        Mr. Alvarez. We do, sir. The decision is announced
    immediately after the meeting, detailed minutes are made
    publicly available.
        Mr. Foster. I wasn't referring to just the official
    meetings where decisions take place. I am talking about e-mail
    between two people who are kicking back and forth saying, I
    just met with this European guy, he said that we are going to
    terminate this program then, it would be really good if we
    coordinated. That sort of--
        Mr. Alvarez. We do. We have policies for all of the
    documentation, including e-mails that we keep for the length of
    time that we--we have a schedule that is in accord with the
    archivist about keeping that information. Also in the monetary
    policy area, we keep all the memoranda that are used for the
    FOMC meetings and a complete transcript of the meeting. We make
    those available to the public after 5 years. And we keep them
    permanently ourselves.
        Mr. Foster. But the--for example, all the detailed stuff,
    e-mails, internal memorandums, person-to-person
    correspondences, will those be available to historians 10, 20,
    30 years from now? What is the policy there?
        Mr. Alvarez. The policy of the disclosure of that
    information depends on the type of information. Some is made
    available as time passes. Some of it contains confidential
    information that is not made available even as time passes. So
    it depends on the type of information. But as I mentioned on
    FOMC matters directly, the full transcript and all the
    supporting memoranda for the decision, so that includes the
    complete discussion.
        Mr. Foster. It is the less formal--is any information
    deliberately destroyed or is it simply kept but not released?
        Mr. Alvarez. The only information that is destroyed is
    information that the archivist, the national archivist has
    agreed, can be destroyed and that is usually information that
    has no historical value and that is destroyed according to a
    set schedule and that is to allow capacity for new information.
        Mr. Foster. Would it be possible for you to point us at the
    policies the archivist follows, in some appropriate level of
    detail so we can see the classes of stuff that is preserved and
    destroyed and the sort of general guidelines that are being
    followed?
        Mr. Alvarez. Yes, sir.
        Mr. Foster. Thank you. I yield back.
        The Chairman. The gentlewoman from Minnesota.
        Mrs. Bachmann. Thank you, Mr. Chairman. Thank you, Mr.
    Alvarez, for being here. I wondered if you could give us an
    update on the status of the Fed's appeal of the ruling in the
    Bloomberg Freedom of Information request lawsuit requiring the
    Fed to disclose the identity of the firms that accessed the
    discount window?
        Mr. Alvarez. Yes. As you are aware, Congresswoman, there
    are two cases. There is the Bloomberg case and the Fox News
    case, both decided by district judges in the second circuit
    about 3 weeks apart on identical issues, one saying that the
    information should be released, one saying information should
    not be released. Both cases are in the process of being
    appealed to the second circuit. The appeals, the appeals are
    due in the next few weeks, and I expect them to be both fully
    appealed.
        Mrs. Bachmann. And you had said that prospective discount
    window borrowers would be discouraged from using the facility
    if their identities were to be disclosed. But a recent Wall
    Street Journal article described how the sheer prices of
    Citigroup and E-Trade Financial Corporation actually increased
    after the public learned that they received government support.
    So I am wondering how those circumstances would differ.
        Mr. Alvarez. I think the concern on many of the facilities
    is that they are used by healthy institutions to try to
    unfreeze some of the markets. So for example, our commercial
    paper funding facility, the borrowers in that facility are not
    troubled institutions. They are institutions that are trying to
    restart the market for commercial paper, the same with our TALF
    facility where we are trying to restart the market for student
    loans, for auto loans, for small business loans, for credit
    card loans. And the investors and the borrowers in those
    markets are regular market players. They are not troubled
    institutions. The concern is that borrowers in those
    facilities, if their names were disclosed, would be viewed by
    the public incorrectly as institutions that are troubled
    because we have also lent in other ways to troubled
    institutions. We have lent to Bear Stearns and we did do the
    AIG loan. Clearly troubled institutions.
        And so because we do help troubled institutions and those
    that are not troubled, the concern of those that are not
    troubled is that they will be lumped in with the troubled ones
    and that is the reason--it is--market prices would not
    necessarily go up. Market stigma would, in fact, happen.
        Mrs. Bachmann. Section 13.3 of the Enabling Act and the
    powers with the Federal Reserve, there has been some
    disagreement from individuals on whether or not this was the
    first time that the Fed had opened the discount window to a
    private investment bank when it opened it up to Bear Stearns.
    Was that the first time, or did they open it up prior in the
    late 1980's?
        Mr. Alvarez. The Federal Reserve opened 13.3 during the
    1930's, but not to--not to investment banks in the 1930's.
        Mrs. Bachmann. In the 1980's, in the mid 1980's, there--
        Mr. Alvarez. It never opened the window in the 1980's to
    anyone. The next time that it made the 13.3 available was
    actually the 1960's, but that was all to thrift institutions.
    It didn't actually use the authority again until right before
    Bear Stearns with the TSLF facility and then the Bear Stearns
    loan. Those were the same week.
        Mrs. Bachmann. I am sure you understand the concern we have
    as Members of Congress as we looked at the extraordinary
    actions the Federal Reserve took in regard to Bear Stearns and
    regard to the investment banks and then, of course, looking at
    the TARP. And one thing that I have wondered is whether
    Congress shouldn't, in fact, revisit and tighten up the
    language of 13.3. When you read the language of 13.3, the
    Federal Reserve seems to have the power to do virtually
    anything it wants to do with no restriction whatsoever. Would
    that be a prudent thing for Congress, do you think at this
    time, to take up and tighten up, if you will, or maybe pull the
    leash on the Federal Reserve on the actions it could take with
    the taxpayers' money?
        Mr. Alvarez. Two points there. One is I would like to point
    out that the 13.3 lending to specific institutions like Bear
    Stearns, AIG, Citi, and Bank of America, for example, are
    subject to GAO audit, which is just to make sure that is clear.
    But then whether the Fed should continue to have 13.3
    authority, our chairman has suggested that if resolution
    authority were enacted so that we would have--the government
    would have another tool for implementing--for passing on the
    risks to shareholders and creditors and the government wasn't
    left with the choice of bailing out or bankruptcy, then that
    would be an atmosphere or a context where some revision to 13.3
    may be appropriate.
        The Chairman. The gentlewoman's time has expired. The
    gentleman from--I did pass--I want to make one point. Earlier,
    the gentleman from Georgia talked about hearings. I interpreted
    that as some unhappiness with the record. He assured me that
    was not the case, that he was talking about going forward. But
    I did check. And according to our records, there have been 28
    appearances before this committee in hearings by officials of
    the Federal Reserve, the Chairman more than anybody else. But
    in the last calendar year, we have had 28 appearances by
    officials of the Federal Reserve, the Chairman, other members
    of the Board of Governors, and other officials. The gentleman
    from Colorado is recognized for 5 minutes.
        Mr. Perlmutter. I need a primer or whatever on the Federal
    Reserve. Remind me how many Federal Reserve banks there are.
        Mr. Alvarez. There are 12 Federal Reserve banks.
        Mr. Perlmutter. And how many Governors are there per bank?
    Is there one Governor per bank and then a Board? Or how is the
    structure, the decision-making structure set up?
        Mr. Alvarez. In Washington, D.C., there is a Board of
    Governors that has seven members. Right now, we only have 5 of
    those positions filled, but could have 7 members. Each reserve
    bank has one president for the reserve bank and then board of
    director, this is set by Congress, a board of directors of nine
    members, there are three elected by the banks, representing
    banks, three elected by the banks that represent commerce at
    large and three selected by the Board of Governors to represent
    the public at large.
        Mr. Perlmutter. And the Board of Governors, how are they
    selected? They are selected either by Congress or by the banks
    or how are they selected?
        Mr. Alvarez. The Board of Governors in Washington are
    appointed by the President and confirmed by the Senate, all
    seven.
        Mr. Perlmutter. So there are seven?
        Mr. Alvarez. Yes.
        Mr. Perlmutter. How are the presidents--who selects a
    president or how do they become the president of the banks?
    Kansas City, we talked about the Federal Reserve of Kansas
    City.
        Mr. Alvarez. They are selected by the board of directors
    but approved by the Board of Governors in Washington.
        Mr. Perlmutter. I guess what I am trying to understand is
    whether there is a confirmation process in the Senate of all
    the Governors or just some of the Governors?
        Mr. Alvarez. All of the Governors in Washington.
        Mr. Perlmutter. And then--but there are 12 Governors. There
    are only seven Governors?
        Mr. Alvarez. Correct.
        Mr. Perlmutter. In all of those--we have two openings right
    now?
        Mr. Alvarez. That is right.
        Mr. Perlmutter. And their terms are how long?
        Mr. Alvarez. 14-year terms and they are staggered to expire
    every 2 years.
        Mr. Perlmutter. Remind me again, how are the presidents
    selected?
        Mr. Alvarez. The presidents of the reserve bank are
    selected by the board of directors of the reserve bank but then
    with the approval of the Board of Governors in Washington.
        Mr. Perlmutter. Let us go back to Mrs. Bachmann's questions
    on 13.3. Explain what it takes to have an action taken in
    unusual and exigent circumstances under 13.3.
        Mr. Alvarez. Under 13.3, the Federal Reserve Board may
    authorize a reserve bank to make a loan if by a vote of at
    least five members of the Board of Governors in Washington, the
    Board determines that there are unusual and exigent
    circumstances. They direct the reserve bank to make sure it is
    secured to its satisfaction, and the reserve bank then has to
    collect evidence that other credit accommodations aren't
    available to the borrower. In those circumstances, the reserve
    bank can make a loan.
        Mr. Perlmutter. Did that occur with the Bear Stearns
    assistance?
        Mr. Alvarez. Yes, it did.
        Mr. Perlmutter. I guess I recall the action being taken,
    which I personally felt was very unusual for the Federal
    Reserve, and it is borne out in your testimony that it never
    happened except maybe back in the 1930's.
        Mr. Alvarez. Right.
        Mr. Perlmutter. Can you describe the process that happened
    to get that done? Did it happen over a week's period, 2 weeks'
    period, a day's period, 2 hours? How did you get all five guys
    together? Or gals or guys. What is the makeup of the Board, the
    five who exist today?
        Mr. Alvarez. We have five Governors. There is one woman and
    four men. And the extension of the credit at the time--at the
    time the Bear Stearns loan was made, there were 5 men. We had
    them all on the phone during the night before the loan
    discussing the financial condition of Bear Stearns, discussing
    market conditions. We had a substantial amount of information
    that was coming in from the Federal Reserve Bank of New York
    and from other--and from the Administration, from their
    sources. Then we convened a Board meeting on that Friday
    morning as soon as everyone was able to get to the office. We
    actually had to use an emergency provision because there were
    only four Governors who could be available at the time the vote
    was taken. A fifth one was on a plane coming back from Europe.
    But the statute provides for a vote of less than 5 in that
    specific situation.
        Mr. Perlmutter. Did that same thing occur with Lehman
    Brothers?
        Mr. Alvarez. With Lehman Brothers, we did not extend
    credit. There was no--
        Mr. Perlmutter. But was there a meeting? Was there a
    discussion? Were there requests?
        Mr. Alvarez. There were constant updates with the Governors
    about the condition of the organization and the developments,
    whether there would be a purchaser or not a purchaser. So we,
    in those days leading up through the Lehman weekend, had quite
    a lot of conference call meetings.
        Mr. Perlmutter. Thank you.
        The Chairman. I think the gentleman from Colorado has just
    given us an example of the kind of information that could come
    forward with no damage that people would like to hear. So this
    is, I think, an illustration of the kind of information and
    what it could bring forward without any problem. We are going
    to keep going. I am hoping if Mr. Watt is back in time, we
    won't have a break. If members want to go vote, there is only
    one vote. It is the last vote. We do intend to keep going. I
    will stay as long as--so we will keep--we may just keep going
    continuously. Members can go vote and come back. The gentleman
    from Texas.
        Mr. Hensarling. Good morning, Mr. Alvarez. Forgive me. I
    just came from speaking on the Floor. So if we cover some old
    material, I apologize. I was here at least for your initial
    statement and in it you talked about one of the concerns that
    the Fed had with the GAO audit with respect to the discount
    window and broad lending facilities that--and I am
    paraphrasing. Well, no. I will go ahead and quote. That could
    ``significantly increase potential borrowers' fears of stigma
    and adverse reactions.'' To the extent it is analogous with
    respect to lining up for TARP funds, there didn't seem to be a
    stigma associated with that. I am not sure the transparency
    kept people from accepting TARP funds. I am not sure it had--
    some would maintain it had a beneficial impact on the market.
    What might we be missing here?
        Mr. Alvarez. I think the TARP funds--it is useful to think
    of them in two parts, the CPP program, the original program,
    Capital Purchase Program, was presented as a confidence
    inducing program that was available to healthy institutions and
    designed for healthy institutions. And that is one of the
    reasons that I think institutions were at first very eager to
    participate because it gave them capital that they could use.
    They didn't want to--and they wanted to make that--they wanted
    to be--have that capital available. As time went on, though,
    the participation, the CPP, as we have seen, has become
    something of a red letter and institutions are trying very hard
    to get out of the CPP program. Also, the other types of TARP
    programs include the more direct lending to folks like AIG
    and--
        Mr. Hensarling. So you believe it is a red letter stigma as
    opposed to perhaps not wanting Congress involved in their
    business? Which is simply what I personally hear from the CPP--
        Mr. Alvarez. I am sure there is some of both.
        Mr. Hensarling. If I could with the limited amount of time
    I have, Mr. Alvarez, and forgive me if this is old ground, but
    I want to talk a little bit about 13.3. Number one, in the
    Fed's interpretation, what exactly are the limits on your 13.3
    authority?
        Mr. Alvarez. The 13.3 can only be triggered if it is
    unusual and exigent circumstances. And we need a super majority
    vote of the Board of Governors finding that. And it is only
    lending. It is not investments. And it is only lending that is
    secured to the satisfaction of the lending reserve bank. Also
    there has to be--
        Mr. Hensarling. So the Maiden Lane facilities which broke
    new ground, isn't that something functionally beyond lending?
        Mr. Alvarez. The Maiden Lane facilities are very much the
    same thing as if those assets were kept on the books of JPMC
    and we were lending against those assets at JPMC. This is
    actually a more transparent way to identify the assets, to keep
    track of the assets and to prevent them from being lost in a
    larger organization.
        Mr. Hensarling. Speaking for myself, I do think it is
    important for the Fed to retain their 13.3 powers, but clearly
    they have been exercised in a way that I think has been totally
    unanticipated and certainly unprecedented in our Nation's
    history. I simply do not believe that ultimately an unelected
    group of individuals should have unfettered ability to impose
    trillions of dollars of taxpayer exposure liability without
    some type of check or constraint by the people's elected
    officials.
        So my question is, what constraints would the Fed be
    willing, or does the Fed feel any need for any constraints on
    their 13.3 powers whatsoever?
        Mr. Alvarez. The Administration has proposed having a dual
    key system as it were to have the Treasury approve 13.3 lending
    as well as the Board of Governors and the Chairman, my
    Chairman, Chairman Bernanke has offered the suggestion that if
    resolution authority is granted, then there may be no need for
    13.3 lending by the Federal Reserve in situations where there
    is a specific institution that needs--
        Mr. Hensarling. Now, it is the broad lending facilities--I
    am looking somewhat retrospectively. But if those broad lending
    facilities were enacted on a contractual basis, could you not
    have negotiated resolution authority?
        Mr. Alvarez. I don't think we could have accomplished
    resolution authority with a contract because the investors and
    shareholders would have--the creditors--
        Mr. Hensarling. Didn't Chairman Bernanke say, I believe in
    this committee, that had he had resolution authority, AIG
    essentially would have been shut down? My question is, before
    you gave them the money, could you have negotiated resolution
    authority?
        Mr. Alvarez. He would have been able to--if there was
    resolution authority, use that tool rather than the Federal
    Reserve lending.
        The Chairman. Will the gentleman yield? I think the problem
    is in the absence of a bankruptcy, they could have negotiated
    with AIG but not with the creditors of AIG, that would have
    been the problem, that they could have gotten agreements from
    AIG as a condition of the money, but then that would have left
    the creditors legally free standing.
        Mr. Hensarling. I see the time I didn't have--
        The Chairman. Actually, we were in expiration time when I
    said it. I am now going to recognize the gentlewoman from
    Illinois and go vote. And she will question in lonely splendor,
    but the gentleman from North Carolina is on his way back and we
    will continue. The gentlewoman from Illinois is recognized for
    5 minutes.
        Mrs. Biggert. I just have a couple of quick questions, Mr.
    Alvarez. Have any of the financial institutions provided any
    feedback regarding the possible adoption of this new
    transparency policy?
        Mr. Alvarez. I am sorry. Which transparency--what the
    Federal Reserve has been--the information we have been making
    publicly available?
        Mrs. Biggert. No. Have the financial institutions talked to
    the Fed about the possibility of this bill being enacted and
    the transparency policy?
        Mr. Alvarez. I am not aware of financial institutions
    weighing in on the Ron Paul bill, H.R. 1207. There have been
    some economists who have issued a letter--suggesting that would
    undermine the independence of monetary policy.
        Mrs. Biggert. And that is all that you have heard then?
        Mr. Alvarez. There have been financial institutions
    weighing in on release of the names of borrowers at facilities
    and in fact in the litigation that was referenced earlier, as
    trade associations for borrowers have actually written in that
    would cause them to be uninterested in participation and it
    would damage them.
        Mrs. Biggert. So that really would apply to the bill in
    effect even though it wasn't addressing the--initiation an
    indirect way.
        Just one other question, and maybe this was asked already,
    but given how the Federal Reserve actions affect the value of
    the dollar, would greater transparency improve international
    confidence in the dollar? Or would it be less?
        Mr. Alvarez. The information about the Federal Reserve's
    transactions, the overall information about Federal Reserve
    transactions with foreign governments is disclosed in summary
    on our balance sheet. But also, the facilities, the specific
    swap facilities that we have are listed in detail in the
    information we make available to the public. So that already is
    okay and doesn't undermine confidence.
        Mrs. Biggert. Okay. I have to go vote too, so I will yield
    to Dr. Paul.
        Dr. Paul. You are very lucky. I am back, and I have
    unlimited time.
        Mr. Alvarez. It is always a pleasure to see you.
        Dr. Paul. So let me think about this and keep this thing
    going because we do want to conclude our hearing shortly. But I
    might get more specific on some of the questions I talked about
    earlier having to do with, say, the international events. I
    have been particularly interested in that. And we do repeal
    that provision in the code that says that you aren't
    responsible for telling us about that.
        Now, I am sure you think I have overstated this position
    about when the Federal Reserve gets involved in agreements with
    other central banks and other governments. Why doesn't that
    borderline along the line of having a treaty or an agreement
    and being allowed to finance that outside the appropriations
    process?
        Mr. Alvarez. Well, we are not--I think it overstates what
    the Federal Reserve does. We set up accounts with foreign
    entities, foreign central banks, to allow them to conduct their
    business in the dollar. So there are dollar reserves that
    foreign countries have. Sometimes foreign countries buy U.S.
    Government securities. They need a place to deposit their
    securities and the interest that comes from those securities.
        That is not providing financial assistance to foreign
    governments. We are simply acting--
        Dr. Paul. But, indirectly, wouldn't it be? If you have a
    guaranteed loan, even though you might not say it is literal
    financing, but if you guarantee something and they agree to do
    something. What if you want them to intervene in the currency
    markets; you might ask them to do that, wouldn't you?
        Mr. Alvarez. That is an aspect under the responsibility of
    the Treasury. That is not the responsibility of the Federal
    Reserve.
        Dr. Paul. Yes, but I think you work rather closely. You are
    both on the President's Working Group on Financial Markets, so
    you collude there on what you might do.
        Are you aware of any precise times that the Federal Reserve
    gets involved in the gold market? Because, actually, there is
    authority, in the Exchange Stabilization Fund at least, to be
    involved. But what do you know about the Fed ever being
    involved in the gold market, whether it is the futures market
    or loaning gold? Because a lot of central banks are in the
    loaning and selling of gold constantly.
        Mr. Alvarez. And the Federal Reserve Bank of New York is a
    trustee for some of the gold stock of foreign central banks. It
    holds the gold. But it doesn't conduct transactions itself in
    that gold. That is done by the foreign central banks.
        Dr. Paul. But you have no evidence that our Federal Reserve
    has ever been involved in the gold market?
        Mr. Alvarez. I confess not to being an expert in
    transactions we might have done in gold over the history of the
    Federal Reserve, but we could get you that information.
        Dr. Paul. Of course, what I am suggesting, the reason for
    the audit is to find out whether indirectly we might be
    involved by going it another central bank or a government and
    doing the work that we want to do. And that is why I think the
    full audit is necessary.
        And I believe we have had the return, and I am willing to
    yield back.
        Mr. Watt. [presiding] I thank the gentleman.
        Mr. Grayson from Florida is recognized for 5 minutes.
        Mr. Grayson. Thank you, Mr. Chairman.
        Mr. Alvarez, has the Federal Reserve ever tried to
    manipulate the U.S. stock market?
        Mr. Alvarez. No, sir, not that I am aware of.
        Mr. Grayson. Not that you are aware of, but you are the
    attorney, right?
        Mr. Alvarez. That is right.
        Mr. Grayson. So you might not even know, right?
        Mr. Alvarez. I would expect to know if there were something
    like that being done. I am not aware of that at all.
        Mr. Grayson. And if you did know, you would be bound by
    attorney-client privilege and you wouldn't be able to tell us,
    right?
        Mr. Alvarez. Sir, if there were something the Federal
    Reserve was doing outside its legal authority, I would have an
    obligation to say something about that.
        Mr. Grayson. All right. So we agree that any participation
    by the Federal Reserve in the stock market or the futures
    market is outside the Federal Reserve's legal authority, right?
        Mr. Alvarez. The Federal Reserve has some authority to
    regulate various aspects of markets and participate in markets
    in certain ways. So I think your question is too categorical,
    but--
        Mr. Grayson. I think not, actually. Why don't you answer
    it?
        Mr. Alvarez. I don't know--your question is so overbroad, I
    don't know where to begin to answer that.
        Mr. Grayson. I don't think it is that overbroad. I would
    like you to tell me whether it is within the Federal Reserve's
    legal authority to try to manipulate the stock market or the
    futures market.
        Mr. Alvarez. I don't believe the Federal Reserve tries to
    manipulate the stock market.
        Mr. Grayson. ``Tries?'' Come on. Do they?
        Mr. Alvarez. The Federal Reserve's obligation and what it
    does in monetary policy is try to influence interest rates and,
    in that way, to maximize employment and to stabilize prices. I
    am not sure how that fits into your question.
        Mr. Grayson. Now, if, in fact, the Federal Reserve were
    trying to do that, or doing it, isn't that something that we
    would want to know?
        Mr. Alvarez. To the extent that the Federal Reserve
    influences interest rates, it does make announcements of that
    decision immediately. It takes--
        Mr. Grayson. That is not what I said. I said, manipulate
    the stock market or the futures market. Wouldn't we want to
    know? Yes or no?
        Mr. Alvarez. Could you define what you mean by--
        Mr. Grayson. I think you know what I mean, Mr. Alvarez.
    Now, wouldn't it be very helpful to have a GAO audit on that
    subject? Wouldn't it?
        Mr. Alvarez. I don't know what it is that you are seeking
    to audit, sir.
        Mr. Grayson. What I just said.
        Mr. Alvarez. It would be helpful if you could outline
    your--
        Mr. Grayson. Let's go on to something else. Does the
    Federal Reserve actually possess all the gold that is listed on
    their balance sheet? Do they actually possess it?
        Mr. Alvarez. Yes.
        Mr. Grayson. Has that been audited by the GAO?
        Mr. Alvarez. I believe that is within the GAO's authority
    to audit. It certainly is something that our independent
    accountant is able to verify and does.
        Mr. Grayson. So if I go in and ask for a GAO audit, you
    won't oppose it, right?
        Mr. Alvarez. To auditing the presence of gold on the
    facility? I don't see any reason to object to that.
        Mr. Grayson. Good.
        Now, there have been all sorts of claims of insider trading
    and front-running by the people who execute the trades for the
    Federal Reserve in the market--by the way, who is that? Who
    actually executes the trades for the Federal Reserve in the
    markets?
        Mr. Alvarez. I haven't heard of any allegations of front-
    running.
        Mr. Grayson. Well, that is funny, because you are the
    general counsel, so if anybody would know about it, you would
    think you would know about it.
        Mr. Alvarez. The Federal Reserve Bank of New York is
    responsible for effecting the transactions, implementing
    monetary policy.
        Mr. Grayson. Okay. So, then, answer the question.
        Mr. Alvarez. The Federal Reserve Bank of New York.
        Mr. Grayson. That is your answer?
        Mr. Alvarez. You wanted to know who implements--
        Mr. Grayson. You have people sitting at screens at the
    Federal Reserve Bank actually executing those trades? You don't
    delegate that to anyone else?
        Mr. Alvarez. No, the Federal Reserve Bank of New York--of
    course it is a process where there are several steps. The
    Federal Reserve Bank of New York executes transactions through
    primary dealers.
        Mr. Grayson. Okay. Who are the primary dealers?
        Mr. Alvarez. The list of primary dealers is on our Web
    site.
        Mr. Grayson. Do you know any of them? Can you name a single
    one?
        Mr. Alvarez. Sure. JPMC.
        Mr. Grayson. What?
        Mr. Alvarez. JPMorgan Chase.
        Mr. Grayson. Okay. Do you mind if we have a GAO audit to
    see whether there has been front-running or insider trading by
    them? Do you mind? Is that okay with you?
        Mr. Alvarez. I am not sure I have any decision-making
    authority.
        Mr. Grayson. Well, you are the General Counsel. I want to
    know if you are going to try to stop it.
        Mr. Alvarez. GAO audits government agencies, and you want
    the audit of a private entity. I think that is something that
    Congress would have to change the authority of the GAO to
    allow.
        Mr. Grayson. All right. Now, let's say--you are right. That
    is what we are doing right here, by the way. Let's say that the
    Federal Reserve gave a billion dollars to a very promising
    fledgling institution called the Dick Cheney Savings and Loan,
    whose only asset is an unnumbered Swiss bank account. Don't you
    think it would be a good idea to have the GAO have authority to
    look into that?
        Mr. Alvarez. Under the GAO authority as written, a loan by
    the Federal Reserve to a specific entity, say, a particular
    bank, as you have pointed out, would be subject to GAO audit.
    We don't oppose that.
        Mr. Grayson. All right. Now, the Federal Reserve has given
    $1 trillion out, $1 trillion in the past 12 months. That is how
    much the increase in its assets and liabilities on its balance
    sheet has been. Who got the money? This, by the way, is a
    question sent to me by Beatrice Delgado. She just wants to know
    who got the money. Will you tell me?
        Mr. Alvarez. Most of the increase in our balance sheet has
    been the purchase of U.S. Government securities and the
    purchase of agency guaranteed securities in the open market
    from market participants broadly.
        Mr. Grayson. And what about the rest of it?
        Mr. Watt. The gentleman's time has expired.
        Mr. Grayson. All right. Thank you, Mr. Chairman. But I
    really think we need answers to these questions, and the only
    way to get answers to these questions is to have the GAO audit
    the Federal Reserve.
        Thank you very much.
        Mr. Watt. I just wanted to make the point that, if the
    gentleman has more questions, there will be an opportunity to
    submit them in writing. That opportunity will be available.
        The gentleman from California, Mr. Royce, is recognized for
    5 minutes.
        Mr. Royce. Thank you.
        Let me ask Mr. Alvarez, the Austrian economist von Mises,
    who did a lot of studies in terms of business cycles, came to
    the conclusion that central banks really have a tendency to,
    sort of, extenuate or exacerbate those business cycles. And
    looking back at what the Fed did in 2002 through 2006 by
    setting negative real interest rates in June of 2002 forward,
    it would match the thesis that the Austrian economist always
    put forward, the thesis that the Fed had this tendency to set
    interest rates too low and, as a consequence, from time to
    time, create these asset bubbles--a housing bubble, in this
    case.
        Looking back, when you look at what the Fed did during that
    4-year period, and when you look at the fact that central banks
    in Europe followed suit and did the same thing, do you think
    that thesis might be right, and that was one of the reasons
    that we had such a balloon in the housing market?
        Mr. Alvarez. Congressman, as a lawyer, there is good reason
    they don't let me be involved in monetary policy. And so, I
    apologize, but I can't give you an educated answer to that
    question.
        Mr. Royce. All right. Then let's talk about another issue.
    We had a hearing here yesterday, and we listened to Paul
    Volcker. And he criticized President Obama's Administration's
    plan to subject, ``systemically important financial firms to
    more stringent regulation by the Federal Reserve.''
        In his testimony to the House Financial Services Committee,
    Mr. Volcker said--and I am just reading from Bloomberg News,
    but we heard him say it yesterday--``Such a designation would
    imply government readiness to support the firms in a crisis,
    encouraging even more risky behavior in a phenomenon known as
    `moral hazard.'''
        Would you like to comment on Paul Volcker's opposition to
    having the Fed walk down this road with the Administration and
    his concern about the consequences of that moral hazard?
        Mr. Alvarez. We, too, are very concerned about moral hazard
    from the designation of systemically important institutions.
    But we are concerned that the point we are starting from is
    that too much of the public believes that some institutions are
    ``too-big-to-fail.'' So the moral hazard problem already
    exists.
        And that is why we are asking for actually two revisions.
    One is a new resolution regime, resolution authority, because
    that helps offset moral hazard by making it clear that the
    government doesn't have to simply bail out institutions because
    they are afraid of them going into a disorganized bankruptcy.
    Instead, you have a resolution regime where the government can
    impose haircuts on shareholders and creditors as appropriate,
    and that will help reinstitute market discipline.
        The second thing is more strenuous regulation and
    supervision of those institutions that are systemically
    important, including enhanced capital requirements, enhanced
    risk management requirements, and other things to offset the
    moral hazard.
        Mr. Royce. Well, listen, I am all for market discipline,
    but when the Richmond Federal Reserve says that 45 percent of
    the liabilities in our financial system back in 1999 were
    backed by the safety net of the Fed, were basically guaranteed
    in one way or the other by the Fed--and you know that number is
    far greater today. Whether or not you agree with the steps
    taken in recent months to prop up financial institutions--I
    voted against the bailouts, but whether you agree with it or
    not, it is apparent the Federal Reserve became the path of
    least resistance for many of those bailouts. Hence our concern
    here.
        So let me go to the final point made by Paul Volcker, who
    is the White House Economic Recovery Advisory Board chairman
    who is so adamantly against the Administration's plan here. He
    says, ``The danger is that the spread of moral hazard will make
    the next crisis bigger.''
        Now, if the last time you had a moral hazard problem, in
    that there was a presumption that the Fed was going to bail out
    45 percent of the institutions, and now I think you would
    concede it is a lot bigger than that, why wouldn't you heed
    Volcker's words here? And why wouldn't we really be looking at
    some solutions to bring about market discipline?
        And why wouldn't we be considering that von Mises and
    others were right in this whole issue of the Fed actually
    helping to compound our problem, in terms of boom and bust
    cycles, through your mismanagement--
        The Chairman. The gentleman's time has expired. If you want
    him to answer, we will give him a few seconds.
        Mr. Alvarez, you can respond briefly, or you can do it in
    writing.
        Mr. Alvarez. The question is so complicated, I think in
    writing is probably better.
        The Chairman. All right.
        The gentleman from Minnesota is next.
        Mr. Paulsen. Thank you, Mr. Chairman.
        Well, first, I just want to say I support Representative
    Paul's effort to bring this legislation to the forefront. And I
    think we do need to review the responsibilities of the Federal
    Reserve to have a better sense of where we are today.
        Before the economic and financial crisis that we went
    through a year ago, we didn't see the Fed on the front page of
    the paper or in the headlines or even see the Chairman give an
    interview on ``60 Minutes.'' That was really unprecedented. And
    so I think it is only natural that a lot of people are asking
    questions about what the Federal Reserve really is about, as
    opposed to just the open market meetings that happen when they
    determine interest rates, for instance. So I think that given
    your role in the bailouts or AIG, etc., it is only natural to
    expect some interest in looking at this.
        Since you are exercising the Section 13(3) authority and
    invoking emergency powers, if you will, why shouldn't we have a
    little bit more, as Members of Congress, the ability to look at
    where the Fed is going, understanding what is on the balance
    sheets?
        We are no strangers to the fact that Chairman Bernanke's
    words, in particular, can move markets when he speaks. And it
    just seems to me that, why shouldn't you believe or why should
    we believe that pulling the veil back on some of the Fed's
    activities and exposing some of these secrets of the temple, if
    you will, could similarly move markets in significant ways and
    expose firms who may not be doing so well?
        Mr. Alvarez. Congressman, in order to allow you to have
    that kind of oversight, we provide substantial information
    about our activities and balance sheet. I think part of the
    difficulty is we haven't been as good as we should be about
    making clear how much information we do provide to the public.
        Our Web site is filled with information about our balance
    sheet, which is audited by an outside accounting firm. All of
    our programs are explained in detail on the Web site. We have a
    monthly report that updates the exposures we have under the
    different facilities, including information about the
    collateral, general information about the borrowers, about the
    timing of the facilities, when they are intended to unwind, and
    the protections we have gotten for the taxpayer.
        In the monetary policy area, we issue, as I mentioned, the
    decision, the moment it is made, detailed minutes shortly
    thereafter and then a complete transcript and the all the
    underlying memos after a lag.
        There is a lot of information that we provide on all of our
    areas of responsibility. And it is not as secretive as I think
    it has been thought to be. Many of these strides are new, done
    in the last 3 or 4 years. And so, it is quite a change from the
    days of the secrets of the temple that were referenced earlier
    in the day. And I think you will find that information very
    helpful.
        Mr. Paulsen. Well, just to follow up, I just think, knowing
    taxpayers are paying more attention now--even when I attend
    parades, people ask me about Representative Paul's bill because
    they want to ask questions about some of the secrecy that has
    been out there. And some of this may have been more revealed in
    the last few years, as you mentioned, but it is really only the
    last year, in particular, where we have seen the Fed on the
    front pages in all the headlines, 3 times a week, for instance.
        And that is probably going to continue in the near term,
    knowing that the Fed is holding and buying a lot of debt and
    buying it from the Treasury. You have one government agency
    essentially borrowing from another, and the taxpayers are going
    to, in essence, be required to bail out the government side. So
    you will see continued pressure, I think, from Members of
    Congress down the road on this, as well.
        Thank you, Mr. Chairman.
        The Chairman. The gentleman from Florida, Mr. Posey.
        Mr. Posey. Thank you very much, Mr. Chairman.
        Besides calling for an audit, we know that Dr. Paul's bill
    makes five other changes, fairly simplistic changes. And for
    the sake of transparency and to put things in a proper
    perspective, I am just going to refer to those sections of the
    code verbatim. Many people in the public would be surprised
    about what is currently secret, so to speak. The law now reads,
    under regulations of the Comptroller General, ``The Comptroller
    General shall audit an agency but may carry out on-site
    examination of an open insured bank or a bank holding company
    only if the appropriate agency has consented in writing.''
         I would like your comments, because we are not going to
    have time for you to respond to all my questions now and get
    answers. I would like, with the chairman's permission, to
    request that you give us specific answers to that question as
    soon as possible, why you think that permission of another
    agency is necessary for the Comptroller General to perform an
    audit it referred to on a bank?
        Number two, current law says--and Dr. Paul's bill is
    deleting this--``Audits of the Federal Reserve Board and
    Federal Reserve Bank may not include transactions for or with a
    foreign central bank, government of a foreign country, or non-
    private international financing organization.''
        Now, I would like you to answer in writing--and you can do
    it verbally if you have time, but I think my questioning will
    probably take the remainder of my time--how this could possibly
    hurt the function of the Fed, and, if not on a daily basis,
    maybe with just a short cooling-off period, as the chairman
    referred to, but these should not be even potentially eternally
    secret actions.
        The next thing it does, number three, is, ``It shall not
    include deliberations, decisions, or actions on monetary policy
    matters, including discount window operations; reserves of
    member banks; securities credit, interest, or deposits; and
    open market operations.'' It astounds me that anybody would
    think that would be harmful to become public information.
        Number four, transactions made under the direction of the
    Federal Open Market Committee. Now, how is that information
    going to harm the financial security of our Nation if it is no
    longer off limits?
        And finally, number five, a part of a discussion or a
    communication among or between members of the Board of
    Governors and officers and employees of the Federal Reserve
    System relating to aforementioned clauses 1 and 3 of this
    subsection.
        The idea that any of that must be eternally secret for the
    financial security of this Nation is incredulous to me. And you
    can start now, if you would like, responding to those items.
    But those are where the fork meets the grits here, so to speak.
    These are the things that the bill actually talks about. We
    have gone and we have talked in some platitudes here and some
    wherefores and whereases, but that is the real basic elements
    of Dr. Paul's bill.
        Mr. Alvarez. If I could address at least one of the points,
    you mentioned the limitations on disclosing information about
    open banks--
        Mr. Posey. Well, we should probably start with number one
    right off the bat. Why do you have to have the appropriate
    agency's permission for the comptroller general to perform an
    audit?
        Mr. Alvarez. Of open banks?
        Mr. Posey. Yes.
        Mr. Alvarez. Yes. The concern there is that disclosure of
    information about the operations of an open bank--any number of
    banks that are not experiencing difficulties--would be
    misunderstood and cause difficulties for the bank, a bank that
    is open and operating and that requires the public's
    confidence.
        And so, consulting with the primary regulator of the bank,
    which is responsible for examining the bank and whose reports
    by law are not made public, is designed to ensure that
    misleading or mistaken information about the health of that
    bank isn't released. It is meant to protect the bank, which is
    an open institution. And its only dealing with open
    institutions, in your example, is to protect that bank--
        Mr. Posey. Just a second. Do you not think that, if we had
    some audits and they been public 2 or 3 years ago, we might
    have not have ended up in the crisis we are in now? Did the
    secrecy not protect some of the misbehavior by some of the
    banking industry, do you think?
        Mr. Alvarez. I, personally, don't think if GAO had audited
    the investment banks or the large banks in the United States
    that GAO would have been able to stop the crisis any better
    than the other agencies.
        The Chairman. The gentleman's time has expired.
        The gentleman from Illinois, Mr. Manzullo.
        Mr. Manzullo. Thank you, Mr. Chairman.
        I am a cosponsor of H.R. 1207. I hope that it proceeds to
    the Floor without being watered down too much.
        The big concern of the American people really has to go to
    what happened in September of last year when the Secretary of
    Treasury came to the Members of Congress and said he needed
    immediately, overnight, $787 billion to buy out troubled
    assets, otherwise the world was going to collapse. And not 1
    cent has been spent of that money on buying out troubled
    assets. We are going on a year now, people are still waiting,
    and Members of Congress--and I voted against that--are still
    wondering why they voted on it.
        But let me ask you this question, Mr. Alvarez. Whenever the
    Fed gets involved, for example in pumping money into AIG, etc,
    is that actually reflected as part of the national debt?
        Mr. Alvarez. No, sir, it is not part of the national debt.
    It is fully disclosed on our balance sheet, and it shows up on
    the Federal Reserve's balance sheet, but it is not part of the
    outstanding debt.
        Mr. Manzullo. So, it is monetized; you just print money. Is
    that correct?
        Mr. Alvarez. Not exactly. And this is an area where, again,
    I am not an expert. The Federal Reserve does a variety of
    transactions to support its lending activities. It lends
    basically--it has government securities that it can sell in
    order to raise the funds to make loans. But that is not
    monetizing the debt.
        Mr. Manzullo. So you are saying that, for all the money
    that has been pumped into these various institutions, that the
    Fed, and the Treasury ostensibly, has sufficient reserves to
    back that up in case of a collapse?
        Mr. Alvarez. I believe the Federal Reserve does, yes.
        Mr. Manzullo. One of the other problems--in fact, I have a
    constituent from Cary, Illinois, who has followed this very
    closely, along with lots of other constituents. People are
    really distrustful of the Fed based upon the cloak of secrecy
    that takes place. But the areas that are of most importance,
    dealing with monetary policy and the discount window are the
    two most important parts of the Fed. In fact, on page 6 of your
    testimony, it says, ``Congress purposefully and for good reason
    chose to exclude from GAO review only two highly sensitive
    areas: monetary policy deliberations, decisions, and actions,
    including open market and discount window; and the other is
    Federal Reserve transactions dealing with foreign countries.''
        So you have actions and transactions that are excluded from
    GAO review. It would take an Act of Congress, would it not, in
    order to go into these two areas?
        Mr. Alvarez. Yes, sir.
        Mr. Manzullo. Okay. And that is what H.R. 1207 attempts to
    do, isn't that correct?
        Mr. Alvarez. That is correct.
        Mr. Manzullo. So the very body that sets the policy of
    review, would you not agree, also has the authority to change
    that policy?
        Mr. Alvarez. Oh, absolutely, sir.
        Mr. Manzullo. And so Members of Congress, you would agree,
    who are very concerned with trying to track all this money
    believe that, by having more transparency, the American people
    will have a better idea as to where their taxpayers' dollars
    are spent? Wouldn't you agree that the American people have a
    tremendous amount of interest in this?
        Mr. Alvarez. This is certainly an area for Congress to
    consider. We are here simply providing our views on what the
    ramifications would be of that kind of congressional action,
    and we are concerned about the effects of making the change
    that H.R. 1207 would make. But it is clearly a decision for the
    Congress.
        Mr. Manzullo. I may submit some questions to you, but I
    want to thank you for your time and your demeanor.
        Mr. Alvarez. Thank you.
        Mr. Manzullo. Thank you.
        The Chairman. The witness is excused.
        I appreciate Mr. Alvarez once again giving us his time. He
    and other members of the Federal Reserve System have been very
    cooperative. And I do think it is the case that, if you compare
    the amount of information that has been released about the
    actions, the decisions, the operation of the Federal Reserve,
    there has already been an enormous difference. And I think that
    makes me confident that we can go, frankly, the fairly small
    steps further that we need to to complete this.
        Mr. Alvarez. Thank you.
        The Chairman. We will now have our next witness, Mr. Thomas
    Woods from the Ludwig von Mises Institute. And I apologize for
    having, in my prior life, mispronounced that. My German isn't
    as good as it could be. Neither is my English.
        Mr. Woods?
        Oh, Mr. Paul will introduce the witness.
        Dr. Paul. Thank you, Mr. Chairman.
        Thomas Woods is a senior fellow at the Ludwig von Mises
    Institute in Auburn, Alabama. He graduated from Harvard
    University and received his master's and Ph.D. from Columbia
    University.
        He is the author of nine books, of which two were New York
    Times best sellers, including, ``Meltdown: A Free Market Look
    at Why the Stock Market Collapsed, the Economy Tanked, and
    Government Bailouts Will Make Things Worse.'' He also won a
    prize in 2006, the 2006 Templeton Enterprise Award, for his
    book, ``The Church and the Market: A Catholic Defense of the
    Free Economy.'' Dr. Woods is also a contributing editor of The
    American Conservative.
        I welcome Dr. Woods as a witness before this committee.
        The Chairman. Please, Dr. Woods.

      STATEMENT OF THOMAS E. WOODS, JR., PH.D., LUDWIG VON MISES
                               INSTITUTE

        Mr. Woods. Thank you, Mr. Chairman, Congressman Paul, and
    other members of the committee.
        Let me begin my summary of my written testimony in support
    of H.R. 1207 by recalling a controversy that erupted in late
    2008. Bloomberg News ran a headline, ``Fed Defies Transparency
    Aim in Refusal to Disclose,'' and the article dealt with
    trillions of dollars in loans whose recipients and whose
    collateral that had been put up were unknown to the American
    people. The editor-in-chief of Bloomberg News, Matthew Winkler,
    stated it very simply. He said, ``Taxpayers, involuntary
    investors in this case, have a right to know who received
    loans, in what amounts, for which collateral, and why specific
    loans were made.''
        Well, he is right, of course. There is no good reason for
    Americans not to know the terms and recipients of these loans.
    There is, likewise, no good reason for them to be kept in the
    dark about the Fed's arrangement with foreign governments and
    foreign central banks. These things affect the quality of the
    money that, in our system, Americans are obliged to accept.
        Now, this seems like common sense, so what are some of the
    common arguments that have been raised against H.R. 1207? Well,
    it would compromise the Fed's independence. And, eventually, if
    we open the books, this will lead inexorably to some kind of
    influence over monetary policy being exercised by Congress.
        I think this is a red herring. The bill neither envisions
    nor calls for any such thing. In fact, the bill is not designed
    to have Congress have any authority over setting interest rate
    targets or any such thing as that. This is part of the Fed's
    central planning apparatus, and it is best to keep this away
    from the Fed or Congress, in my judgment.
        But, ultimately, all we are doing is looking to open the
    books. Congress has a moral and legal responsibility to keep
    tabs on and keep the public informed about the various
    creatures it brings into existence. So these various convoluted
    scenarios by which merely opening the books will eventually
    lead to a floodgate of an inflationary catastrophe at the hands
    of an uppity Congress, I think, are a little over the top.
        Now, at the same time, we hear this objection all the time
    about the Fed's independence, so we should investigate that
    issue. How independent is the Fed? Well, how independent could
    it be if the Fed Chairman is, of course, routinely up for
    reappointment? The Chairman typically wants to ingratiate
    himself into the favor of the President and often will
    accommodate him with loose monetary policy.
        Moreover, try to imagine a Fed Chairman who doggedly
    insisted on maintaining the value of the dollar, even if it
    meant refusing to monetize a massive deficit to fight a war or
    so-called stimulate a depressed economy? You can't imagine it.
        If there is any truth to the idea of Fed independence, it
    is in precisely this: that the Fed, as we have seen in recent
    years and months, has the ability to extend trillions of
    dollars to unidentified recipients on undisclosed terms. Now,
    if that is what we are talking about, I find it hard to imagine
    any self-respecting American who isn't bought and paid for
    hesitating for a minute to challenge that.
        Now, we have also heard that this type of legislation might
    politicize lender-of-last-resort decisions. Well, again, it
    does no such thing. You will find nothing in the text of the
    bill to justify that suspicion.
        But even if it did, how is this a departure from current
    practice? I think most Americans, you are going to have a hard
    time persuading them that the decisions made regarding the
    various bailouts were all made entirely with an eye to the
    public good and entirely disinterested and were not political
    at all. I think some Americans--and this ranges from
    progressives all the way to traditional conservatives--have
    rather a different thesis in mind, which is that, for instance,
    Goldman Sachs just might have a little more political pull than
    the rest of us.
        Well, let me also make clear that supporters of this bill
    are not interested in a watered-down version of the bill. This
    would only further stimulate suspicion that somebody is hiding
    something.
        Now, it seems to me the audit is coming. The writing is on
    the wall here. Seventy-five percent Americans polled agree that
    the Federal Reserve should be subject to the GAO audit that
    1207 has in mind. If the legislation should fail, well, it
    seems to me that we will only further stimulate interest and
    transparency in the Fed, because people who up to this time
    hadn't had any interest in the issue will being to wonder,
    ``What could they be hiding?''
        So I think it is probably best for the Fed simply to accept
    that the audit is coming. I think that would be a more
    dignified way of handling the situation than what we have seen
    from the Fed thus far, which has, by and large, been the
    approach of urging Americans, urging the peons who populate the
    country to quit pestering their betters with all these
    impertinent questions. I think the Fed should take to heart the
    words that Americans hear every time a new Federal surveillance
    program is uncovered: If you have done nothing wrong, you have
    nothing to worry about.
        Thank you.
        [The prepared statement of Dr. Woods can be found on page
    71 of the appendix.]
        The Chairman. The gentleman from North Carolina.
        Mr. Watt. Thank you, Mr. Chairman.
        Mr. Woods, on behalf of Congress, I thank you for the
    political advice you have given us. And I suspect the folks
    over at the Fed would thank you for the advice that you have
    given them about how they should approach this issue. On a
    substantive basis, I don't know that I heard much here that
    would help us be informed about the substance of what we are
    here to do.
        Is there anything in the bill, that you are aware of, that
    would deal with the Fed Chair being reappointed by the
    President? There is nothing in this bill that is going to
    address that, is there?
        Mr. Woods. No, there isn't. The reason I mentioned--
        Mr. Watt. Okay. All right. I am just trying to figure out
    whether we are having a philosophical discussion here or a
    substantive discussion.
        You mentioned opening the books, which I think we all are
    supportive of. Do you distinguish between an audit of the kind
    that most people would think of as an audit and a policy audit,
    or do you not make that distinction?
        Mr. Woods. I think, in this case, given that Congress has
    delegated to the Federal Reserve System the power to make
    monetary policy and, in this case, the Federal Reserve System
    and the enforcement of the system is a creature of the Federal
    Government and an active--
        Mr. Watt. I understand that, Mr. Woods. I am asking you,
    would you, for the purposes of this bill, or for deciding
    whether to do or not do whatever we are talking about, give the
    authority under this bill--would you make a distinction between
    a policy audit and opening the books, as you say, which would
    be a numbers audit?
        Mr. Woods. Well, the reason I answered the question as I
    did--
        Mr. Watt. Would you make a distinction first and then tell
    me why you would make the distinction?
        Mr. Woods. I would like it know what they are doing all
    down the line. Now, we have talked--there has been some
    discussion about time lags that could be negotiated, in terms
    of--
        Mr. Watt. That is not the question I am asking. It might be
    the next question I ask.
        Mr. Woods. I honestly thought it was, sir.
        Mr. Watt. I am trying to figure out whether you, as a
    practical matter, make a distinction between a policy audit and
    a numbers audit.
        Mr. Woods. I would, indeed, like to know some of the
    rationales that go into these decisions.
        Mr. Watt. But do you acknowledge that there is a
    distinction?
        Mr. Woods. Well, sure, there is. But--
        Mr. Watt. Okay. All right.
        Mr. Woods. --it is in the fact that the Fed is created by
    an Act of Congress and enjoys a government monopoly. So,
    naturally, there is going to be a wider scope, and Americans
    would want to insist on a wider scope, of investigation of such
    an institution.
        Mr. Watt. Okay.
        Mr. Chairman, in the interest of time and with the
    recognition that we are not going to get any substantive
    responses here as opposed to another political speech, I think
    I will just yield back.
        Before I do that, let me ask unanimous consent to insert
    into the record a Wall Street Journal article dated July 15,
    2009, ``Economists Warn Fed Independence at Risk'' and a
    document entitled, ``Petition for Fed Independence,'' signed by
    numerous academic people--
        The Chairman. Without objection--
        Mr. Watt. --75 academics supporting the Fed's independence.
        The Chairman. Without objection, it is entered into the
    record.
        The gentleman from Texas.
        Dr. Paul. Thank you, Mr. Chairman.
        I would like to follow up on an economic question regarding
    the secrecy of the Fed. If the Fed operates in secrecy and we
    don't have transparency, I would like to see if you could
    expand a little bit on what kind of economic consequences this
    has.
        For instance, the free-market school is well aware of the
    fact that businesspeople make a lot of mistakes when interest
    rates are at an artificial level rather than at a market level.
    Interest rates aren't there because of savings but because of
    economic policy. But this is along that line but not exactly
    that.
        Does the secrecy of the Fed inspire maybe some misguided
    speculations? Could this secrecy encourage more mistakes, maybe
    not be the cause of all the mistakes, but could this cause the
    businessman more difficulty? The other side tends to argue,
    well, we have to keep it secret because we don't want to shake
    up the markets, and secrecy conveys confidence.
        Could you address that? And could the opposite be true?
        Mr. Woods. I think the opposite is true. Because I think,
    when you have secrecy, inevitably what winds up happening, how
    do people make their judgments as to what is really going on?
    On the basis of wild speculation and wild unfounded rumors. So
    the more transparency you have, the less free rein is given to
    that type of irrationality. So the clearer we can be with the
    business community, the better. And the more they can
    understand, ``Is this phenomenon that I am seeing real? Is it
    because there has been some Fed manipulation?'' It is easier
    for them to make decisions if they are permitted to see the
    economy clearly.
        And I would, if Congressman Paul doesn't object, I would
    like to add something about the subject of independence. The
    reason I raised it is that opponents of the bill are, I think,
    raising this as a red herring. This is not the subject of the
    bill. But, secondly, it is not, by any means, getting off the
    subject to question whether the much vaunted independence is
    actually real, whether there is already political influence on
    the Fed. That is entirely a warranted statement.
        So I did want to say that in my defense. But, Congressman
    Paul, you still have some time.
        Dr. Paul. Right. And I want to touch on the subject of
    history, because I know you are also an historian. You did
    mention that 75 percent of the American people support this
    effort to have more transparency over the Fed. But, in this
    recent court case, it was indicated, the Freedom of Information
    Act, that several rather mainstream groups supported this, as
    well. It isn't just a fringe element that is requiring that.
    Dow Jones has supported this effort, New York Times, AP,
    Gannett, Hearst, Advanced Publications, and the Republica--the
    reporters' commission on free press. So there are a lot of
    people who do support this.
        And, as I mentioned in my opening remarks, there has been a
    lot of this going on for a long time, but it seems like there
    is something historically important here. And could you address
    that in a more long-term, historical perspective?
        Mr. Woods. Certainly. I think it is safe to say that, since
    1913, as a political issue, the Fed has, by and large,
    succeeded in depoliticizing itself. And that, indeed, is the
    goal of the Fed, to some degree, is to isolate monetary policy
    from the public, the argument being that technocrats can better
    handle this than regular Americans so we better isolate it from
    them.
        And so, what that means is that politicians, by and large,
    have not paid much attention to the Fed, until one presidential
    campaign I can think of in the last couple of years. Other than
    that, I can't think of any presidential campaign that raised
    the Fed as an issue.
        So the fact that a bill like this comes forward, has
    hearings like this at the full committee level, when efforts
    like this have been tried in the past, as the chairman
    mentioned at the outset, and have failed, suggests that this
    is, indeed, a historic moment.
        I believe that the arguments being made against the bill
    are, by and large, a lot of scare tactics by the Federal
    Reserve, which is not used to being under this type of public
    scrutiny.
        I absolutely discount the bunch of academic economists who
    warn about the Fed's independence. Without the Fed's
    independence, it won't be able to fight inflation as
    effectively and monitor interest rates as effectively. So, in
    other words, ``We have just had the biggest asset bubble in the
    history of the world, thanks to the Fed, but if they lose their
    independence, they won't be able to do as good a job as they
    have been doing.'' This is really shocking, that we have
    professional economists who are going to take that position. It
    is an absurd position. It is at variance with the fact that the
    Fed has been the great enabler of inflation. And to say that we
    need it to be secret, need the books to keep it closed in order
    to prevent inflation from breaking out, shows an utter
    ignorance as to the causes of inflation.
        I also recommend an article by Lawrence White, now recently
    at George Mason University, and several years ago did an
    article looking at how influenced by the Fed the economics
    profession is in various ways.
        The Chairman. Let me just ask--first of all, I just want to
    say, you said there is all this time without a hearing. We are
    having a hearing because I decided to have one. I was a strong
    supporter of Henry Gonzalez in the late 1980's when he pushed
    this. I have consistently asserted my right to critique
    monetary policy.
        In fact, Congress did once assert itself in this throughout
    the Humphrey-Hawkins Act over the objections of the Federal
    Reserve. And people might disagree ideologically with the
    formulation, but the central bank of the United States has a
    dual mandate, whereas most central banks have a single mandate,
    namely to fight inflation. Under the Humphrey-Hawkins Act
    enacted by Congress before I got here, the Federal Reserve has
    a mandate to worry about unemployment equally with inflation,
    or employment. And there have been efforts by Federal Reserve
    Chairs consistently to try to evade that, and we have blocked
    it.
        So I have always felt that. And we are having this hearing
    because it seemed to me an important thing for us to do. I am
    in my third year of the chairmanship; we did have some other
    items that grabbed our attention earlier.
        I do have one specific question. On the question of making
    public all of their transactions by themselves, do you think
    that should be done instantaneously, or do you think some time
    lapse is appropriate?
        Mr. Woods. I think, on this question, I wouldn't take a
    dogmatic position. I am certainly open to a compromise on this.
    I think some type of reasonable time lag would not defeat the
    purpose--
        The Chairman. Good. I think, again, my view is that no one
    should be able to do business with the Federal Government in
    secret forever, but we do recognize that, if it is instantly
    available, there could be a market impact that would not be a
    good idea. So I appreciate that conceptual agreement. I think
    we can work together.
        The last thing, though, you did say, which troubled me, I
    must say, a little bit, is that essentially anyone who
    disagreed with you was bought and paid for. By whom? And what
    was the going wage? Maybe I have been missing out on something.
        Mr. Woods. Well, my point was that, if you look at--
        The Chairman. No, I am asking you, by whom? You said
    somebody was bought and paid for. You must have been bought and
    paid for by somebody.
        Mr. Woods. Well, in some cases, by the Fed itself. I think
    the Fed has exercised a tremendous influence, directly or
    indirectly, over the--
        The Chairman. Well, it is one thing to exercise influence;
    it is another to be bought and paid for.
        Mr. Woods. Well--
        The Chairman. It is one thing--well, but I think language
    is important, Mr. Woods. And I don't like--
        Mr. Woods. But what about millions of dollars in research
    grants?
        The Chairman. Well, let me say this. My colleague has
    objected to people characterizing this as extremism. He pointed
    to these mainstream groups. Although, I will say, the number of
    us who will be surprised that mainstream media groups want more
    information--they want to know battle plans. So that is not
    mainstream; that is their own self-interest.
        But I think characterizing--basically you said anybody who
    would disagree--go back and look at your words--would be bought
    and paid for, I think that is an unfortunate formulation. I
    think there is room for intellectual disagreement here. And I
    think there are a lot of people probably on that list who
    weren't bought and paid for in any tangible sense.
        Mr. Woods. Well, I bet, though, if we did a poll of the
    various people who are calling congressional offices on behalf
    of the bill, I just can't imagine that many are calling up and
    saying, ``You know what? I am telling you, I am going to vote
    you right out of office if you open the books of the Federal
    Reserve.''
        The Chairman. Well, that is totally unresponsive to what I
    said, Mr. Woods. Why would you do that? I am talking about my
    objection, frankly, to your characterizing all of those who
    oppose this--and I am generally for it--
        Mr. Woods. Well, perhaps it was--
        The Chairman. --as bought and paid for. I really would like
    to avoid that kind of--
        Mr. Woods. Perhaps it was an unfortunate rhetorical
    flourish. But it was done in the spirit of--
        The Chairman. Thank you. I would just advise you, as a
    witness, look, you are free to do it. Why don't you leave the
    unfortunate rhetorical flourishes to us? We get paid for it.
        The gentlewoman from Minnesota--
        Mr. Watt. Mr. Chairman--
        The Chairman. Yes, I will yield to my colleague.
        Mr. Watt. I just want to discourage this gentleman back
    here from making props for the witness. Please, I am happy to
    have him sit in this room, but for him to be holding up that
    sign behind this witness, I think, is inappropriate.
        The Chairman. No, there will be no--sir, the police officer
    had some questions about what you were doing. I signaled to him
    that we had no objection to your sitting here. But I will in an
    even-handed way enforce today what I have enforced with Code
    Pink or anybody else: no demonstrations; no signs. People are
    free to sit here. The gentleman from North Carolina is exactly
    correct. And there will be no conversation.
        The gentlewoman from Minnesota.
        Mrs. Bachmann. Thank you, Mr. Chairman.
        I appreciate Mr. Woods being here. And I have had a chance
    to read about half of the book, and I really appreciate the
    book that you wrote, ``Meltdown: A Free Market Look at Why the
    Stock Market Collapsed, the Economy Tanked, and Government
    Bailouts Will Make Things Worse.'' So thank you for your input
    on that.
        I enjoyed your statement, I have enjoyed your remarks. And
    I am wondering, you had asked the question in your remarks, why
    is the Fed in panic mode over this bill? Why are they in panic
    mode over this bill?
        Because it seems like we are in an era now when no
    politician can oppose transparency. That is what every
    politician is for, is transparency. And yet this seems to be
    the one anomaly in all of government. And yet it is at the
    fulcrum of our government, and it is at the fulcrum of,
    potentially, the economic meltdown that we are still going
    through and have yet to recover from.
        Why the panic?
        Mr. Woods. Well, I think here we can only speculate,
    precisely because we don't have the information.
        My suspicion is that I think they may be engaged in
    activity that they would rather not have disclosed to the light
    of day. The reason I emphasized in my statement that I believed
    that the standard arguments being made against the audit were
    unpersuasive and were not grounded in the text of the bill was
    thereby to leave open the possibility that the real arguments
    against their bill are not actually being advanced.
        But I can't know what those are. I have my own private
    speculation as to things the Fed might be doing, but I elect
    not to mention them here. But that is what I think.
        There was an article in Forbes not long ago, and the title
    of the article was, ``The Federal Reserve Needs To Be Boring
    Again.'' And the thesis of the article was that the Fed has
    been doing so many unprecedented and extraordinary things, both
    qualitatively and quantitatively, over the past 2 years that it
    has attracted more attention to itself than we have seen in a
    very long time. And so it really has to stop doing that, so
    that people will go back to not paying attention to it anymore
    and, as one member said earlier, not even really knowing
    anything about what it does. I think that is the way they like
    to do it.
        And I am not putting words in people's mouths. Alan Blinder
    of Princeton wrote this in Foreign Affairs, ``monetary affairs
    are best left to the technocrats.'' That is his word, not mine.
        And so I think this is an unusual position for the Fed to
    be in, for the spotlight to be on it. And I think this makes
    them unhappy and nervous.
        Mrs. Bachmann. One thing that I am concerned about is the
    Fed's balance sheet and the toxic assets that remain on that
    balance sheet. Because, ultimately, we know that we will be the
    ones, the taxpayers of this country, to have to sop up the mess
    that is on that balance sheet.
        And I think the overnight loans, the fact that we don't
    know who the overnight loans are going to, what the identities
    are and, as you had stated, the collateral, I think that makes
    a lot of us very nervous. I think maybe everything is fine
    behind the curtain, but we see that a lot of things aren't fine
    in a lot of the great financial institutions that came to the
    brink of collapse and, in fact, did collapse.
        The other question I would have for you would be on Section
    13(3) and whether or not it would be prudent for the Congress
    to take a look at Section 13(3) and tightening that up and
    limiting the scope of the Fed's authority.
        It seems to me, if we could get a full perspective of an
    audit, both on policy and on the numbers of the Federal
    Reserve, if we could get a full perspective of the Federal
    Reserve, what has been going on since 1913, that it would be
    easier for us to know if it would be prudent for us to tighten
    up the limitations on what they can do.
        I was shocked and didn't read 13(3) until after the
    economic meltdown. When I read the breadth of the authority of
    the Federal Reserve, it struck me that they can do anything.
    They can do anything they want, and we are the ones, the
    American taxpayers, left holding the bag. And what check do
    they have? There is no check on that authority. And I think
    that is very frightening for the American people.
        And I am just wondering if you could comment in Congress on
    Section 13(3).
        Mr. Woods. Okay. Well, I support exactly what you are
    saying. I think it makes perfect sense to tighten these things
    up.
        And I would also like to clarify, the way in which
    taxpayers get hit here may not be quite direct, but that if the
    Fed, let's say, takes on an awful lot of toxic assets and these
    assets have very, very low value or zero value, then it impairs
    the Fed's ability--when we are being promised, ``Don't worry,
    we will suck all this money back in,'' well, if the balance
    sheet is overloaded with qualitatively degraded assets, how are
    they going to sell them? How are they going to get that money
    back in? And so then we will all suffer from the inflation tax.
        But, yes, I agree, I say turn the screws, absolutely.
        Mrs. Bachmann. Let me ask you your perspective on
    inflation--
        The Chairman. The gentlewoman's time has expired.
        The gentleman from California.
        Mr. Sherman. Thank you, Mr. Chairman.
        There is always a fight between democracy on the one hand
    and bureaucracy and plutocracy on the other. Secrecy does not
    lead to purity and technically correct decisions. Secrecy plus
    power equals corruption. That is especially true over time.
    That is especially true when it is the power not to set
    interest rates, but the power to lend money on concessionary
    terms to particular companies.
        Now, the chairman and many others in this committee have
    talked about needing to focus on 13(3). A number of my
    colleagues who are here now were not here when I questioned Mr.
    Alvarez, but his answers were very scary as to 13(3). Because
    the Federal Reserve Board has testified before that they will
    make only virtually no-risk loans under 13(3), but their
    general counsel testified that just about any loan in any
    amount would be allowed under 13(3) as long as the Board felt
    secure. And that might very well mean they have a 51 percent
    chance of repayment; he wasn't all that specific.
        So we have an agency that can now make not risk-free loans,
    but higher-risk loans, at least 51 percent--even on a junk bond
    you have a 51 percent chance of being repaid--in enormous
    amounts and, Mr. Woods, you are saying without any scrutiny as
    to how secure they are.
        If I gather your testimony correctly, you are saying that
    they have extended billions and billions of dollars of loans
    that they tell us are fully secured but they will not reveal to
    Congress what security they have?
        Mr. Woods. That seems to be the case. And so, I think this
    is why this has become such a mainstream issue. This is why, of
    course, Bloomberg is in favor. And then Dr. Paul mentioned all
    these completely mainstream outlets who have nothing against
    the Fed, per se. They believe the Fed has an important role to
    play, but that this is unacceptable from the point of view of
    average Americans, who have a right to know what is going on
    with the institution that has custodianship of their money.
        Mr. Sherman. And even if this Fed made all the right
    decisions for all the right reasons, if you empower any agency
    to make high-risk loans or risky loans--not high-risk loans,
    but risky loans on concessionary terms, and to simply tell the
    public, ``Don't worry, you are fully secured'' or ``You are
    secured enough'' or ``We won't tell you what security we have,
    but trust us,'' and they can pick one company and not another,
    over time--one of the things that we do is we advise other
    countries on how to set up democratic institutions. Trust me,
    nobody at the State Department, nobody at USAID, nobody at DRL
    would suggest this kind of power plus secrecy, power to convey
    wealth to individual companies in enormous and unlimited
    amounts plus total secrecy.
        Mr. Woods, the Fed's best argument against this bill is
    that the oral statements at the FMOC meetings should be kept
    private so that people can speak honestly. Would you think the
    bill would be impaired in its objectives if we just said,
    ``Okay, you can speak freely at the FMOC meetings; the GAO
    isn't going to read the transcript?''
        Mr. Woods. Well, this legislative aspect I would almost
    prefer to refer to Congressman Paul. Of course, there are
    different things. There is the Board of Governors, there are
    all sorts of different levels, where we can get some
    information now, 5 years after the fact. So now we know where
    Ben Bernanke stood on the interest rate question in 2003.
        But on a question like this, that really deals with a
    technical detail, I would defer to Dr. Paul.
        Mr. Sherman. Why don't I yield to Dr. Paul? I don't know if
    he was listening.
        Dr. Paul. Well, certainly not permanently, but I would want
    to hear about them someday. They claim they released these
    anyway after--
        Mr. Sherman. Well, yes, I am just--
        Dr. Paul. --years, but I think the sooner, the better. But,
    obviously, we don't want to monitor and look at them the next
    day or the next week, but I would think that maybe 3 months or
    6 months would be reasonable.
        Mr. Sherman. I look forward to working with you on this,
    because I would hope that we would pass legislation. And if we
    can take away the Fed's best argument against it, I think that
    may help us.
        The Chairman. Or we could wait for the movie.
        The gentleman from California.
        Mr. Sherman. Wait for the movie?
        Mr. Royce. Thank you, Mr. Chairman. I presume that one of
    the reasons that the Federal Reserve made an error on setting
    the interest rates too low for such a long period of time and
    other central banks followed suit is because in the 1930's,
    there had been a real problem with the Fed setting interest
    rates too tight. Frankly, I think what transpired is again--the
    Fed thought deflation was going to be a problem and as a result
    they set negative interest rates and they set those negative
    interest rates 4 years running. I asked Mr. Alvarez this
    question. But I really believe that was part of what created
    the balloon in asset prices and I suspect you would agree with
    me. As I had said, von Mises--his study on business cycle
    theories showed the propensity of central banks to do that. But
    what worries me most right now is a study in 1999 by the
    Richmond Federal Reserve that 45 percent of all liabilities in
    the financial system were backed by the Federal Government. And
    it is the moral hazard aspect of this and the fact that we have
    compounded this going forward by bringing the Fed in deeper and
    further in terms of that moral hazard challenge. And I would
    like your comment on that.
        Mr. Woods. Certainly. On the issue of deflation
    incidentally--and that was the reason--the fear of deflation,
    that they had to keep interest rates very low. Ben Bernanke,
    before he was Fed Chairman, was the one who gave a speech
    around 2002 warning of deflation and he spooked the markets
    because no one else was talking about deflation at that time.
    So I think that was a hyped-up concern. But the moral hazard
    problem, I think, is the key problem. Because how do we move
    forward from here plausibly claiming that, oh, listen, we
    bailed you out up to this point. But if you fail tomorrow, that
    is it. How can this be taken seriously? And unfortunately, an
    institution like the Federal Reserve system--when I get a
    question like this, I, unfortunately, have to delve into an
    aspect of the question that I have somewhat forsworn to
    discuss.
        But the Fed, in effect, institutionalizes this moral hazard
    problem because there is no physical limitation on the amount
    of money it can create to bail somebody out and everybody knows
    that. Secondly, there is at least the possibility that there
    existed the Greenspan put. People knew Greenspan is not going
    to let things go under. He comes to the rescue of long-term
    capital management 1998. Do you think some of these firms would
    have been in the shape they were in by the time they started
    collapsing if long-term capital management had been allowed to
    collapse, and they realized the game is up, we actually have to
    run sensible enterprises it is worth asking why are equity
    ratios so low in the financial sector.
        We are being told we need higher capital requirements and
    so on. That may be a good idea, but we should ask the more
    fundamental question: Why are they so low? Why aren't they so
    low in the shoe industry or the shellfish industry or the hat
    industry? And the answer is they don't have lenders of last
    resort that have the ability to bail them out. The
    International Monetary Fund acknowledged this in April 2008, in
    a report, they said that the financial sector is depending much
    too much of its liquid problems on expected intervention by the
    monetary authority. This is a very significant problem
    especially because in the wake of some of the decisions that
    have been made, the too-big-to-fails have become even bigger.
    So we have not solved the problem. The problem is hanging
    over--
        Mr. Royce. You have actually compounded it. Because if we
    give the Fed, then, a secondary responsibility which is to try
    to overcompensate for businesses that might go bust, they might
    do that by setting the interest rate too low, long-term capital
    management being a case in point. So the more of this
    responsibility you put on their shoulder, the more you lessen
    their focus on keeping a stable monetary unit and keeping the
    stable monetary unit long-term is the thing that is going to
    bring about the most market discipline, the most long range
    planning, the least amount of waste in the system in terms of
    destruction because you don't have a boom/bust cycle.
        What we are doing is compounding the cyclical, the depth of
    those cycles basically. Would you concur with that? And I want
    to make one last point. I think that getting Congress involved
    in this would sort of compound the problem. Whether it is on
    the issue of unemployment or whatever good cause we are trying
    to involve ourselves in, the likelihood is that we are going to
    further that extension of boom and bust in the cycle.
        Mr. Woods. There is no question about it. This is how Hayek
    won the Nobel Prize in 1974, for arguing that if you set
    interest rates artificially--well, look. Interest rates aren't
    arbitrary. And if you set them artificially, you are just
    opening yourself up for massive errors by everybody,
    businessmen, investors, consumers. And that is exactly what has
    happened to us
        The Chairman. The time has expired. The witness is excused.
    The hearing is adjourned.
        [Whereupon, at 12:24 p.m., the hearing was adjourned.]

                                A P P E N D I X

                               September 25, 2009

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