[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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