[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]




                    AUDIT THE FED: DODD-FRANK, QE3,
                    AND FEDERAL RESERVE TRANSPARENCY

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                        DOMESTIC MONETARY POLICY

                             AND TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 4, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-67









                                _____

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO R. CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff
        Subcommittee on Domestic Monetary Policy and Technology

                       RON PAUL, Texas, Chairman

WALTER B. JONES, North Carolina,     WM. LACY CLAY, Missouri, Ranking 
    Vice Chairman                        Member
FRANK D. LUCAS, Oklahoma             CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   GREGORY W. MEEKS, New York
BLAINE LUETKEMEYER, Missouri         AL GREEN, Texas
BILL HUIZENGA, Michigan              EMANUEL CLEAVER, Missouri
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
DAVID SCHWEIKERT, Arizona













                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 4, 2011..............................................     1
Appendix:
    October 4, 2011..............................................    29

                               WITNESSES
                        Tuesday, October 4, 2011

Auerbach, Robert D., Professor of Public Affairs, Lyndon B. 
  Johnson School of Public Affairs, University of Texas at Austin    14
Brown, Orice Williams, Managing Director, Financial Markets and 
  Community Investment, U.S. Government Accountability Office....     3
Calabria, Mark A., Ph.D., Director, Financial Regulation Studies, 
  Cato Institute.................................................    16

                                APPENDIX

Prepared statements:
    Paul, Hon. Ron...............................................    30
    Auerbach, Robert D...........................................    33
    Brown, Orice Williams........................................    43
    Calabria, Mark A.............................................    70

              Additional Material Submitted for the Record

Brown, Orice Williams:
    Addendum to three responses provided during the hearing......    77

 
                    AUDIT THE FED: DODD-FRANK, QE3,
                    AND FEDERAL RESERVE TRANSPARENCY

                              ----------                              


                        Tuesday, October 4, 2011

             U.S. House of Representatives,
                  Subcommittee on Domestic Monetary
                             Policy and Technology,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Ron Paul 
[chairman of the subcommittee] presiding.
    Members present: Representatives Paul, Luetkemeyer, 
Huizenga, Hayworth, Schweikert; and Peters.
    Chairman Paul. This hearing will come to order.
    Without objection, all members' opening statements will be 
made a part of the record.
    This morning, we are holding a hearing entitled, ``Audit 
the Fed: Dodd-Frank, QE3, and Federal Reserve Transparency.'' I 
will yield myself 5 minutes for opening remarks.
    Transparency of the Federal Reserve has been an issue that 
I have been working on for many years, and I consider it very, 
very important, and we have been making some progress on this. 
Back in the 1970s, there was a major effort made to get more 
transparency of the Fed, but unfortunately it actually 
backfired and gave more protection to the Fed from any 
inquiries made by the Congress.
    One thing I would like to make clear is my efforts to have 
more transparency of the Fed aren't equated to that of wanting 
Congress to manage day-to-day operations of the monetary 
policy. Quite frankly, I think managing of the monetary policy 
should be more involved with a free market, free market of 
interest rates, rather than anybody believing they can manage 
that from a day-to-day viewpoint.
    Frequently, it is said that the independence of the Fed 
must be protected at all costs. I usually think once there is 
an emphasis on independence of the Fed, it usually means the 
secrecy of the Fed, and it is quite a bit of a difference, but 
the Fed hides behind this independence so there is no political 
influence.
    But I think more people now are starting to realize that 
the Fed isn't truly independent from political influence 
because indirectly, and sometimes more directly, it is involved 
in political decisions or at least private and secret decisions 
made to serve some political interest.
    The Constitution is rather clear on if anybody is to have 
any oversight, it would be the Congress rather than the 
Executive Branch. The ability to do this, of course, has been 
hindered. The Congress created the Federal Reserve with the 
Federal Reserve Act of 1913, and therefore, obviously the 
Congress has something to say about it. Not only did they 
create the Fed, but they have changed the rules. Congress has 
passed laws giving instructions to the Federal Reserve, so 
clearly, Congress has the responsibility of oversight of the 
Federal Reserve.
    I think it is very interesting that one of the arguments 
for independence is that we can't allow the people to know what 
is going on with the banks; that if all of the sudden, we knew 
that a bank was having a problem, this would be bad information 
for the people to know. And then that is used as an excuse to 
prop up certain banks and make sure bailouts occur and that 
there is a lender of last resort, and there is no confusion or, 
otherwise, no correction that might be necessary.
    But in many ways, the Fed performs a function exactly 
opposite of what the SEC is supposed to do. The SEC is a 
regulator that is supposed to go in and look at the books and 
throw out some rules so that people know what is going on and 
get information out. It seems to me at least, that the Federal 
Reserve does exactly the opposite.
    The significance of monetary policy is really the 
overriding issue about the Federal Reserve, and what has 
happened since 1913 and actually what is happening today, 
because we are in the midst of a major crisis, and there are 
many of us who have come to the conclusion that the business 
cycle is very much related to monetary policy. So, if the 
business cycle is related to monetary policy, this should be of 
vital interest to all of us. If we connect the two, the Federal 
Reserve and the business cycle, then we see that recessions and 
depressions are a result of the business cycle. First, you have 
the boom and you have to have the correction, so you have to 
have the bust.
    The other important relationship of the Federal Reserve to 
what Congress does, and for too long, it has actually been 
symbiotic, the Congress has been negligent in oversight, but 
they have been very complacent about deficits being 
accommodated. If the Fed was not so accommodative and always 
buy the debt and keep interest rates artificially low, there 
would be a lot more restraints on the Congress. But as long as 
Congress wants to spend money and they don't want to raise 
taxes--that is not popular--and borrowing becomes difficult, 
then there is a better way from their viewpoint to do it, and 
that is just to allow the Fed to create money out of thin air, 
which for those of us who believe in less government is better 
than more government, whether it is warfare or welfare, we see 
that the Federal Reserve has a strong influence in allowing our 
government to grow.
    So I am very pleased to chair this hearing today, and I am 
very pleased to know that we are making progress. We didn't get 
a full audit last year, but we did get an audit coming out of 
the Dodd-Frank Act. We did get a lot more information, and 
today we are going to receive more information, as well as the 
court cases that have come about. So compared to even 4 years 
ago, a lot of progress has been made in the right direction, 
but from my viewpoint, we have a long way to go.
    I have concluded my opening statement.
    Do any other members wish to make an opening statement?
    Okay. We will then go ahead and start with our first panel. 
Our first panel consists of Ms. Orice Williams Brown, who has 
spent her 21-year career in civil service at the GAO office. 
She is currently the Managing Director of GAO's Financial 
Markets and Community Investment team. Her portfolio of work 
includes banking, securities futures, and insurance issues. 
Most recently, she has been responsible for leading much of 
GAO's work on the financial crisis, Treasury's Troubled Asset 
Relief Program, the Federal Reserve System and its emergency 
lending programs, and regulatory reform. Ms. Brown received her 
MBA with a concentration in finance from Virginia Tech. I now 
recognize Ms. Brown for her testimony.

STATEMENT OF ORICE WILLIAMS BROWN, MANAGING DIRECTOR, FINANCIAL 
       MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT 
                     ACCOUNTABILITY OFFICE

    Ms. Brown. Thank you. Chairman Paul, members of the 
subcommittee, I am pleased to be here today to discuss our 
recent report on the Federal Reserve's emergency programs.
    As you well know, the study was required by the Dodd-Frank 
Wall Street Reform and Consumer Protection Act. It is the first 
comprehensive assessment of the Federal Reserve's use of 
emergency authority under section 13(3) of the Federal Reserve 
Act in response to the recent financial crisis. It also covers 
a number of programs that were carried out under sections 10(b) 
and 14 of the Federal Reserve Act.
    This morning, I would like to briefly highlight a few of 
our findings.
    First, we found that the Federal Reserve and its emergency 
programs were subject to a number of internal and external 
audits. None of these audits found material weaknesses, and 
when issues were uncovered, the reserve banks generally 
addressed the deficiency in a timely manner. However, we did 
find that some operational audits had not been completed until 
the emergency programs had been operational for over a year.
    Second, the New York Fed was the primary player in 
executing most of the emergency programs authorized by the 
Board of Governors and the Open Market Committee. However, one 
program, the Term Auction Facility, was executed across all 12 
Federal Reserve Banks through their discount window operations. 
To implement and operate the various programs, the New York Fed 
used over 100 vendors to provide a variety of services, ranging 
from legal services to asset management. We found that most of 
the contracts were awarded noncompetitively and they were not 
recompeted after the period of exigency had passed. For a 
significant portion of vendor fees, Reserve Banks were 
reimbursed by program recipients or fees were paid from program 
income.
    Third, we found that while the Federal Reserve took steps 
to manage conflicts of interest, opportunities exist to 
strengthen its policies for employees, directors, and vendors. 
During the crisis, the New York Fed expanded its guidance and 
monitoring for employee conflicts. However, while the crisis 
highlighted the potential for Reserve Banks to provide 
emergency assistance to a broad range of institutions, the New 
York Fed had not yet revised its conflict policies and 
procedures to more fully reflect potential conflicts that could 
arise with this new, expanded role.
    Fourth, we looked at the Federal Reserve's risk management 
practices. We found that it took steps to mitigate the risk of 
loss, such as requiring collateral amounts beyond the loan 
exposure for the early programs, and accepting only highly 
rated assets as collateral for some of the latter, more novel, 
programs. For actions to assist individual institutions, it 
negotiated specific protections. Over time, the New York Fed 
expanded its risk management capabilities and strengthened its 
management of risks across all programs. However, we found that 
neither the Reserve Bank nor the Board of Governors tracked 
total potential loss exposures across all emergency programs.
    Finally, we found that while the Board of Governors took 
steps to promote consistent treatment of participants, it 
lacked guidance and documentation for some decisions. For 
example, Reserve Banks lacked documented procedures to guide 
decisions about restricting or denying access to the programs. 
We made seven recommendations to the Board of Governors to 
strengthen policies for managing noncompetitive vendor 
selections, conflicts of interests, risks related to emergency 
lending, and documentation of emergency program decisions. In 
response, the Reserve Board indicated that it recognized the 
benefits of our recommendations and would strongly consider how 
best to respond.
    In closing, I would also note that many of these programs 
were established at the height of the financial crisis, and 
little public information was provided initially. Over time, 
the Board of Governors and the New York Fed increased the 
amount of information provided to the public, and going 
forward, the Dodd-Frank Act requires even greater transparency 
and accountability for any future actions.
    Mr. Chairman and members of the subcommittee, this 
concludes my oral statement, and I will be happy to answer any 
questions at this time. Thank you.
    [The prepared statement of Ms. Williams Brown can be found 
on page 43 of the appendix.]
    Chairman Paul. Thank you very much.
    I will yield 5 minutes to myself for questions.
    Overall, having done this audit and been involved, was 
there any one thing that you were more frustrated with? Was 
there any obstacle or misunderstanding or the law was 
confusing? Or was this a pretty clear-cut responsibility and 
there weren't that many problems? How do you look at it in 
general?
    Ms. Brown. In general, I would say that the Act laid out a 
pretty clear level of expectation for us in terms of what was 
expected, the programs that we were to cover, and exactly what 
aspects of the program and the operations of the programs that 
we were supposed to cover. So I would say it was fairly 
straightforward.
    Chairman Paul. Okay. And this was a 1-year audit; you just 
have to perform this one time?
    Ms. Brown. Correct.
    Chairman Paul. Would there be much of a problem if we were 
doing this every year as far as accomplishing what you have 
done? What kind of a task is this?
    Ms. Brown. This particular audit, while it was fairly 
straightforward, was an enormous undertaking given the number 
of emergency programs involved. Going forward, if--one, we 
would have to keep in mind the current structure that we have 
around the future ability to perform perform audits. And Dodd-
Frank includes in section 1102 some additional authority for us 
to look at any future credit facilities that the Fed may 
establish and also certain open market or monetary policy 
activities that are delineated in the Dodd-Frank Act. So if we 
were asked to audit those, we would look at any particular 
request in turn, and approach it very much the way we approach 
this.
    Chairman Paul. And from your own experience, you have not 
had to look into the Federal Reserve in the way you did this 
time? Is this something rather unique for your experience?
    Ms. Brown. Yes.
    Chairman Paul. Many say that it is unnecessary to audit the 
Fed because they are already audited annually by an independent 
auditor. These audits are of the Fed's financial statements and 
became a legal requirement in the late 1990s.
    Can you describe to us the difference between these 
financial audits that they would like to say, well, they are 
all inclusive and we know everything, versus an audit conducted 
by the GAO--could you describe the difference between the two?
    Ms. Brown. Yes. GAO actually also does financial audits and 
we do performance evaluations, and the audit that we did and 
issued in July of 2011 falls under the program evaluation 
performance audit arena, and the biggest difference is that we 
in this were asked to look at specific operational issues. We 
were asked to look at the operational integrity issues like 
internal controls over the operations of the programs. We were 
also asked to look at how the programs were implemented and 
stood up.
    Financial audits tend to focus on if--whether or not the 
financial statements are being fairly and accurately presented 
and the controls around the financial reporting. So it tends to 
be much broader and also more in-depth.
    Chairman Paul. Along that line, I want to follow up with a 
similar question. The Dodd-Frank GAO audit has been described 
as a procedural audit. It seems that most of the analysis was 
looking at the protocol and guidelines in place for the various 
emergency lending facilities. What do we know about individual 
transactions? How were they conducted, how was collateral 
evaluated, and who all had knowledge and access to the 
facilities and those things in general? Are they included in 
the GAO's audit or were they not part of the directives given 
by the Dodd-Frank Act, especially on the individual 
transactions, and who knew about them and why they occurred?
    Ms. Brown. We were specifically asked to look at the 
operational aspects of the program, but that includes looking 
at certain individual transactions, specifically when it came 
to assistance to individual institutions. But in terms of 
looking at the broad-based programs, we did look at eligibility 
requirements. We looked at who the largest users were of the 
particular programs, and we also looked at how the decision was 
made from the perspective of who approved the particular 
emergency program--was it the Board of Governors, was it the 
Open Market Committee--and then how the particular Reserve Bank 
implemented the action that had been authorized by the Board of 
Governors or the FOMC.
    Chairman Paul. Thank you. My 5 minutes has expired. So we 
will move on to the next member, the gentleman from Missouri, 
Blaine Luetkemeyer, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. One of the things 
that is concerning to me is the fact that all banks, credit 
unions, thrifts, what have you, they have some entity that 
provides oversight over them. And yet the Fed, which is the 
central bank basically, I guess you would say, of our country, 
has very little if any oversight over it, you know. And some of 
the things that you say here are the things that were not--
because of the prohibitions--you were not able to go into. I 
think it is kind of interesting. Where do you think we need to 
draw the line on this?
    Ms. Brown. GAO's position is that this is a policy 
decision, and wherever the line is drawn and the bar is set for 
us to do whatever action, we will do what Congress asks us to 
do.
    Mr. Luetkemeyer. Okay. Along that line, with regard to the 
emergency loans that were done during the height of the 
situation we had in this country, you say in here that the 
Federal Reserve banks required borrowers in several programs to 
post collateral in excess of the loan amount, programs that do 
not require pledge assets with high ratings, etc., etc. Did you 
see in the way that they handled the loans, was it, in normal 
banking terms--in other words, did they have the normal set of 
requirements for collateral excess over the loan they made, 
normal repayment terms, or what did you see there?
    Ms. Brown. We did look at the security and collateral 
procedures around loans that were made and we evaluated the 
processes they had in place. And we found that they did have 
controls around those, that they did have requirements that 
certain loans be overcollateralized. And in other cases, there 
was a requirement that the collateral posted be highly rated. 
So there were certain controls that were built around the loans 
that were being made.
    Mr. Luetkemeyer. Did you see anything there that was of 
concern to you?
    Ms. Brown. We didn't see anything that raised a major 
concern. We did point out that some of the internal audits that 
had been done had raised some questions around increasing the 
controls around the collateral, and we did look at the extent 
to which those had been addressed, and we found that at some 
point when an issue was raised, the bank would take steps to 
improve the controls that were in place.
    Mr. Luetkemeyer. Have all of those loans been paid back?
    Ms. Brown. For many of the broad programs, they have been. 
There are outstanding loans for the three Maiden Lane LLCs 
related to the assistance to Bear Stearns and AIG.
    Mr. Luetkemeyer. Okay. The point I am going to try and get 
to here, though, is they haven't all been paid back?
    Ms. Brown. Correct.
    Mr. Luetkemeyer. Your audit authority is over with; is that 
correct?
    Ms. Brown. Correct.
    Mr. Luetkemeyer. Therefore, at this point, there is no 
audit authority on those loans that have been paid subsequent 
to your audit or those that are yet to be paid; is that 
correct?
    Ms. Brown. In all cases except for any that involve 
assistance to individual institutions.
    Mr. Luetkemeyer. Do you think it would be a good idea if we 
went back and had a requirement to audit those whenever they 
are all paid off to see if everything is done according to 
sound financial tenets?
    Ms. Brown. It is something that if we were asked to do, we 
would definitely do.
    Mr. Luetkemeyer. That is a policy decision, right?
    Ms. Brown. Yes.
    Mr. Luetkemeyer. Okay. With regard to the open market 
operations of the Fed, one of the things it says here is that 
they are not required to disclose their operations until 2 
years after they take place. How do you get ahold of 
information that is pertinent, that is time-sensitive, that we 
can actually get a good job of seeing everything that is going 
on here? If we can't do it within a 2-year timeframe, that 
seems almost beyond the ability to implement any sort of 
controls or corrections.
    Ms. Brown. We would note that in the audit that we did that 
was issued in July, it was done in many cases less than a 2-
year time period.
    Mr. Luetkemeyer. And one more quick question: With regard 
to the swap lines of things that they have with foreign banks, 
were you able to do anything at all with oversight of that? 
Were you able to look into any of the activities along those 
lines?
    Ms. Brown. That was one of the specific programs listed 
under our authority in Dodd-Frank.
    Mr. Luetkemeyer. What did you find?
    Ms. Brown. We basically looked at how they were structured. 
We found that the Fed had engaged in a number of swap line 
transactions with foreign central banks, and the biggest 
takeaway was that once the Fed engaged in the swap with the 
foreign central bank, any activity of the central bank--the 
foreign central bank was really, from the Fed's perspective, 
that was the central bank's responsibility, and the foreign 
central bank assumed any credit risk from the activities that 
it engaged in.
    Mr. Luetkemeyer. If the chairman will bear with me, just 
one more question. Do you see any risk to the Fed with the way 
it is structured right now?
    Ms. Brown. That is one program that remains open, and the 
authority for that program is open through August of 2012. It 
was one of the programs that had been extended, and as with 
swaps, there is currency risk associated with currency swap-
type of transactions.
    Mr. Luetkemeyer. Okay. I see my time is up. Thank you, Mr. 
Chairman, for your indulgence.
    Chairman Paul. Thank you. I now yield 5 minutes to 
Congresswoman Hayworth from New York.
    Dr. Hayworth. Thank you, Mr. Chairman, and thank you for 
conducting this hearing. Thank you, Ms. Williams Brown, for 
being with us.
    There is a notable statement in the GAO report that some 
Federal Reserve Board decisions to extend credit to certain 
borrowers were not fully documented. And I was wondering if you 
could elaborate on that. What sort of documentation would you 
like to have seen? Was there an explanation as to why the 
documentation was lacking?
    Ms. Brown. In the area of documentation prior to Dodd-
Frank, there wasn't an explicit requirement for the Fed to 
document its decisions. From an audit perspective, that often 
presents a challenge in determining exactly what happened. So 
that requires us to have a number of conversations with the 
relevant players.
    But what we noted is, with the programs, there were 
generally broad eligibility requirements, and institutions that 
were generally considered to be in good financial condition 
were able to participate in a particular program. But to the 
extent that there were exceptions that didn't necessarily 
appear to coincide with the particular process in place, we had 
to have conversations to find out why things happened.
    One example is with the commercial paper lending facility. 
An AIG subsidiary was allowed to continue to participate in the 
facility, even though they no longer met the new requirements--
and that is, that they had been an active participant in the 
commercial paper market--but they were still allowed to 
participate in the facility.
    Dr. Hayworth. Is there further work ongoing to determine 
why that was allowed to occur or--
    Ms. Brown. No.
    Dr. Hayworth. So that now lies with us, I guess, here to--
    Ms. Brown. And we did make a recommendation to the Fed, 
going forward, that if they were to engage in credit facilities 
or any emergency lending in the future, that it is important to 
document decisions, and the Dodd-Frank Act now has a reporting 
requirement. So we pointed out that in order to fulfill that 
reporting requirement in the future, there is documentation 
that has to go along with the decision-making.
    Dr. Hayworth. In order to encourage--
    Ms. Brown. Report it.
    Dr. Hayworth. And presumably to encourage sound decision-
making--
    Ms. Brown. Yes.
    Dr. Hayworth. --so that we are not doing things that don't 
make sense fiscally.
    Ms. Brown. Yes, that. And to be able to then report to the 
Congress what was being done and why.
    Dr. Hayworth. Thank you, Ms. Williams Brown, I appreciate 
that. Mr. Chairman, I yield back the remainder of my time.
    Chairman Paul. I now yield 5 minutes to the Congressman 
from Arizona, Mr. Schweikert.
    Mr. Schweikert. Thank you, Mr. Chairman.
    Ms. Williams Brown, part of this is actually--and my good 
friend from New York was almost touching on parts of this. 
First of all, on the emergency facilities, were you able to 
take a look at how well documented the requests were, the 
systemization of the decision-making? And part of where I am 
leading on this is just your opinion, when you are playing 
auditor, if we were to have another hiccup, do they have 
mechanical rules and steps that are consistent? What did you 
see?
    Ms. Brown. In the retrospective audit, there weren't 
requirements for them to document specific decision points. So 
from that perspective, it required us to go back and attempt to 
reconstruct how decisions were made. Going forward, there are 
new requirements in terms of being able to report out that 
should help provide some additional structure around it, and 
that is one of the things that we also spoke to in some of our 
recommendations.
    Mr. Schweikert. I heard some discussions about--even 
before--some of the new requirements. But do they seem to now 
have been adopted in the--if you and I were to lay out a 
flowchart and say, here is our decision-making process, with 
you and I also understanding this may be a process that 
sometimes has to be done very quickly.
    Ms. Brown. Correct.
    Mr. Schweikert. But it also helps to know what checkboxes 
you are going through saying, okay, we have this, we have this, 
we have this. And from what you are seeing, have those 
documentation requirements, the new ones, been built into the 
system?
    Ms. Brown. I will say that since July, we haven't gone back 
to update the status of the recommendations that we made. So I 
can't say if they have addressed the recommendations that we 
made, for example, for a better documentation process. That is 
not something I am in a position today to say that they have or 
have not done those types of things.
    Mr. Schweikert. Okay. Mr. Chairman, Ms. Williams Brown, 
with that--because where I am sort of hunting is, how did they 
document what assets were being pledged future forward, what 
was being swapped, and how well that was locked in, saying, 
yes, you are pledging this, and once you have pledged it, you 
can't go and touch it anywhere else, and we also have the 
proper mechanics telling us any exposure, like are there any 
sort of--where these assets may have also lent out their value 
to other pledges? I am just--I am trying to understand the 
decision tree, but also the quality of the documentation on 
assets pledged.
    Ms. Brown. In terms of pledging collateral and tracking 
that, we did look at the control process around the collateral 
process, and we did specific drilldowns on two of the 
facilities that the borrowers were able to pledge a wide 
variety of collateral for a single loan. And we did a drilldown 
to look at the collateral that was pledged, and we also did 
some independent evaluation and testing to make sure that those 
controls around those were operational. So there was a process 
around that.
    Mr. Schweikert. When you were looking at some of that, did 
you find some of the assets didn't really--ultimately, the 
market value--add up to what they were put into the pledge?
    Ms. Brown. We looked at the pricing of the collateral, and 
we found in a small percent of cases, somewhere around 2 
percent, that there was some discrepancy in the price of the 
particular collateral that we tracked versus what was included 
in the data that we had gotten from the Federal Reserve. But we 
did not find any type of systematic bias one way or the other 
in terms of how that collateral had been priced.
    Mr. Schweikert. But only about 2 percent?
    Ms. Brown. It was a fairly small percentage.
    Mr. Schweikert. I am surprised. And would some of that have 
been MBS, mortgage-backed securities, because of the way you 
would price it?
    Ms. Brown. Right. I think it cut across a variety of other 
types of collateral that had been posted.
    Mr. Schweikert. Last one, and I am partially doing this 
from writing, and seeing if I can find it in my notes, and this 
one may be asking more of an opinion.
    The Inspector General for the Fed, I think, has also been 
given additional duties for the Consumer Financial Protection 
Bureau; almost wearing two hats, even though they are now 
separated. Any opinion on whether that works?
    Ms. Brown. That is not something we have specifically 
looked at, so I am not in a position to offer an opinion.
    Mr. Schweikert. Gosh darn on that one. Mr. Chairman, I 
yield back my time. Thank you.
    Chairman Paul. I thank the gentleman. I yield 5 minutes to 
the gentleman from Michigan, Mr. Huizenga.
    Mr. Huizenga. Thank you, Mr. Chairman, and I just want to 
express my appreciation for you holding this hearing. I think 
this is very important. I appreciate your time coming in as 
well, and I won't plan on using this full 5 minutes.
    But I am struck by the theme that we are hearing of a need 
for oversight, and I don't want to put words in your mouth, but 
that certainly is the tone that I am catching, that this is a 
good thing that we should--or that has happened. I think it is 
up to us, then, to decide whether this is something we should 
continue. It seems to me that we should.
    I am curious a bit about if you could talk--and I apologize 
if you had--I had to step out for a phone call, but maybe you 
touched on this. I am wondering if you could talk a little bit 
about what some of the lending facilities were used by branches 
and subsidiaries of foreign banks, and were you really able to 
determine why several of those emergency lending facilities 
were primarily used by foreign institutions? I wonder if you 
could talk a little bit about that.
    Ms. Brown. We did look at the largest users across the 
facilities, and we did find that there are certain facilities 
that tended to be used by the branches and agencies of foreign 
banks. And in conversations and following up with the Federal 
Reserve about the reason for that, we found that usually the 
largest lenders of facilities were driven by the composition of 
the market. So if it is a market that there were major foreign 
banks that had branches and agencies in the United States, they 
would have been as likely as a U.S. bank to tap a particular 
facility.
    Mr. Huizenga. And so that wasn't necessarily a region when 
you are saying that could be a product line or--
    Ms. Brown. Product line or a particular market that they 
were active in, because many of the broad-based programs were 
aimed at a particular disruption that was going on in a 
particular market. Commercial paper, some of the money market 
mutual funds had also experienced problems.
    Mr. Huizenga. Thank you. And could you characterize the 
ratio of domestic versus the foreign?
    Ms. Brown. It really varies by program, and I would be more 
than happy to provide a breakdown for each facility for the 
record.
    Mr. Huizenga. That would be great. How many facilities, as 
you are using the term ``facility,'' how many facilities are 
there? How many breakdowns do you think that would be?
    Ms. Brown. There were--I think it was somewhere in the 10 
to 12 range.
    Mr. Huizenga. Okay. I would appreciate the follow-up on 
that. So thank you. Thank you, Mr. Chairman. I appreciate that 
and I yield back.
    Chairman Paul. Thank you. And I now yield additional time 
to the gentleman from Missouri, Mr. Luetkemeyer, for a follow-
up question.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. I would like to 
follow up just a little bit more on the swap line discussion we 
had a little bit ago. Can you tell me how many times the line 
has been used, or is it just beyond this--number of times per 
day--or has it just been only 3 or 4 times in the last 6 or 8 
months?
    Ms. Brown. I am not sure that we tracked it by the number 
of times used, but we focused on the number of foreign central 
banks that were permitted to participate in the swap line. And 
there, would have been through the July timeframe.
    Mr. Luetkemeyer. Do you have an idea of how many times that 
was? We had the Chairman in here not too long ago, and he 
indicated that there was almost zero activity.
    Ms. Brown. I will say that when we issued our report, as of 
the end of June, the balance on the swap lines was zero at that 
time. So it may have been used and repaid.
    Mr. Luetkemeyer. Okay. Looking at those transactions, did 
you see anything in there that would pose a risk to the Fed or, 
therefore, our taxpayers?
    Ms. Brown. I think the potential for--because the Fed would 
be swapping dollars for foreign currency, with an agreement 
that the foreign central bank would reverse the swap at the 
same rate that the other--to the extent that rates move, there 
is a potential risk built into.
    Mr. Luetkemeyer. Did you see where it is a pass-through 
from other existing banks over in Europe through the central 
bank there, or was it just a direct swap through the European 
Central Bank?
    Ms. Brown. It was--once the swap happened with the 
particular central bank that the Fed engaged in swap activity 
with, the Federal Reserve didn't track what happened to those 
dollars once they were in the hands of the foreign central 
bank.
    Mr. Luetkemeyer. Okay. So basically there is a firewall, 
then, between the transaction and wherever else those moneys 
would go to, those other dollars would go to?
    Ms. Brown. Correct.
    Mr. Luetkemeyer. Is that a fair statement?
    Ms. Brown. I guess I am pausing on the firewall, but there 
is definitely a separation, yes.
    Mr. Luetkemeyer. Okay. There is no tangible liability 
exposure to us from one of the other banks in Europe that is 
going to be passed through the European Central Bank? I guess 
that is a better way to put it.
    Ms. Brown. The Central Bank would assume that risk.
    Mr. Luetkemeyer. Okay. So basically, then, there is no 
other risk that the Fed has assumed from those activities.
    Ms. Brown. Right, beyond the swap.
    Mr. Luetkemeyer. Okay. And the only risk that you see there 
is just the normal currency activity or the daily ups-and-downs 
of the value of the currency itself? All those other things in 
the transaction--
    Ms. Brown. There could potentially be others, but that was 
the one that immediately comes to mind.
    Mr. Luetkemeyer. Has the biggest risk?
    Ms. Brown. I would say that is the one that immediately 
comes to mind to me, and I do have a total on the number of 
transactions; 569, that is how many transactions there were.
    Mr. Luetkemeyer. During what time period?
    Ms. Brown. This would have been from the beginning of the 
program through June 29, 2011.
    Mr. Luetkemeyer. Really? Okay. One more quick question. In 
your report, you indicate that there is--the GAO found that 
conflict-of-interest policies could be strengthened. Can you 
give me an example of where there is a conflict of interest 
that you found, that there is a problem or exposure or concern?
    Ms. Brown. We found a number that raised issues. They 
raised an appearance of a conflict, and one had to do with 
senior Federal Reserve Bank of New York officials. They held 
stock in some of the institutions that had received assistance. 
AIG was one example.
    Mr. Luetkemeyer. Did you see a pattern with individuals or 
with particular companies, particular entities, like through 
AIG or other companies or other entities that were out there, 
that they were trying to work with?
    Ms. Brown. I wouldn't say we observed any type of pattern. 
We observed with the vendors that there were situations that 
the Federal Reserve Bank of New York, for example, could have 
taken additional steps to strengthen their management of 
conflicts of interest that may have existed within vendors, and 
done additional oversight of what the vendors were actually 
doing to make sure that they weren't exposed to conflicts.
    Mr. Luetkemeyer. Okay. Very good. Thank you, Mr. Chairman. 
I appreciate the second round.
    Chairman Paul. Thank you. And I now yield for follow-up 
question to Mr. Schweikert from Arizona.
    Mr. Schweikert. And forgive me, I just want to make sure I 
was listening carefully to Congressman Luetkemeyer. On 
facilities that were with foreign central banks, was there a 
currency risk when the assets were moved back?
    Ms. Brown. That issue really comes up on the dollar swap 
lines, because that is actually a swap of U.S. dollars for 
foreign currency, with the agreement to reverse the swap.
    Mr. Schweikert. It would be an unusual instrument to unwind 
it back to the value of the previous swap if there had been 
movement in the currency? That sort of defeats the purpose a 
bit.
    Ms. Brown. It is the nature of the swap, that you agree to 
exchange the currency and reverse it at a particular price, at 
a particular date in the future.
    Mr. Schweikert. Okay. So there was--from what you were 
seeing, there was always a pledge on the value at the end--
    Ms. Brown. For the dollar swap line only.
    Mr. Schweikert. Yes, that is the only one I was interested 
in.
    Second of all, and I know this is a little on the annoying 
side, but if you would have one of your staff reach out to our 
office sometime in a couple of weeks, we would love to be able 
to chase down in writing--as you were saying, it was 2 percent 
that you saw that--of pledged assets that you thought may have 
been outliers. And this is one of those occasions I have to go 
through my file cabinet and find an article from a couple of 
months ago that I think was talking about specifically private 
label MBS that may have been pledged, that may have been much 
further in the dispute of what its true value was. And I am 
just trying to get my head around having read one thing and now 
in testimony making sure I am using the same definitions today.
    Ms. Brown. It is not only an issue of the same definitions, 
but this is something that could vary from facility to 
facility. And my comment was specific to two credit facilities; 
but this could actually be the case in one of the others.
    Mr. Schweikert. It absolutely would be that way. It would 
absolutely be that way. There were five hundred and some 
different ones, as I think I just heard you say--
    Ms. Brown. For the transactions for the dollar swap lines, 
yes.
    Mr. Schweikert. Okay. Last one is: Also, as long as we are 
asking to throw something into note, so that Inspector General 
comment before--I know this really isn't your area--but I would 
love someone, if there is a policy statement somewhere in the 
agency in regard to whether this really works to have one 
Inspector General doing both the Consumer Financial Protection 
Bureau and the Fed, even though they now wear very separate 
hats. And with that, Mr. Chairman, I yield back, and I thank 
you.
    Chairman Paul. I thank you. Does anybody else have any 
follow-up questions? If not, I want to thank the witness for 
appearing. And also, without objection, your written statement 
will be made a part of the record, and you are now dismissed 
and the second panel may come to the table.
    Ms. Brown. Thank you.
    Chairman Paul. We will now receive testimony from our 
second panel.
    Our first panelist, Dr. Robert Auerbach, is Professor of 
Public Affairs at the LBJ School of Public Affairs at the 
University of Texas in Austin. He was an economist with the 
House of Representatives' Committee on Financial Services, 
formerly the Committee on Banking, Finance, and Urban Affairs, 
for 11 years. He assisted Chairman Henry Reuss in the 1970s and 
the 1980s and Chairman Henry Gonzalez in the 1990s with 
oversight of the Fed, spanning four Fed Chairmen: Burns; 
Miller; Volcker; and Greenspan. He is the author of the book, 
``Deception and Abuse at the Fed: Henry B. Gonzalez Battles 
Alan Greenspan's Bank.'' He received two master's degrees in 
economics, one from the University of Chicago and one from 
Roosevelt University under Abba Lerner. He received his Ph.D. 
in economics from the University of Chicago where he studied 
under Milton Friedman.
    Our second panelist is Dr. Mark Calabria who is the 
Director of Financial Regulation Studies at the CATO Institute. 
Prior to joining CATO in 2009, he spent 7 years as a member of 
the senior professional staff of the Senate Committee on 
Banking, Housing, & Urban Affairs, where he handled issues 
related to housing, mortgage finance, economics, banking, and 
insurance. Dr. Calabria has served as Deputy Assistant 
Secretary for Regulatory Affairs at the Department of Housing 
and Urban Development and has been a research associate with 
the U.S. Census Bureau's Center for Economic Studies. He is a 
frequent contributor to the New York Post, National Review, and 
Investors Business Daily, and frequently appears on CNBC, 
Bloomberg, Fox Business, BBC, and BNN. He received his Ph.D. in 
economics from George Mason University.
    I would like to now recognize the second panel and also, 
under unanimous consent, your written testimony will be made a 
part of the record.
    So I recognize Dr. Auerbach.

 STATEMENT OF ROBERT D. AUERBACH, PROFESSOR OF PUBLIC AFFAIRS, 
LYNDON B. JOHNSON SCHOOL OF PUBLIC AFFAIRS, UNIVERSITY OF TEXAS 
                           AT AUSTIN

    Mr. Auerbach. Thank you very much, Chairman Paul and 
members of the subcommittee. I am honored to come back here 
where I worked for 11 years. One thing you left out: I also 
worked in the Reagan Administration, saying the same things, in 
between the periods I worked at the Treasury Department.
    I want to talk about transparency at the Fed. The Fed is 
the powerful central bank of the United States that controls 
the money supply, regulates the banking system, and since 1962 
makes loans to foreign banks without congressional 
authorization. The historical record of Federal Reserve 
officials blocking transparency and individual accountability, 
including destroying source records of its policymaking 
committee since 1995, is clear.
    I want to especially thank Chairman Ron Paul and Senator 
Bernie Sanders for finally getting some kind of an audit at the 
Federal Reserve in the Dodd-Frank Act.
    In 1976, when I was here, I assisted Henry Reuss in putting 
up an audit bill of the Fed. The Fed immediately mounted a huge 
lobbying campaign using the bankers that it regulates to come 
to Washington and go into all the offices here and stop the 
audit. Chairman Reuss went to the Floor of the House later when 
we got direct evidence of how the Fed used their offices and 
their facilities to organize the bankers they regulate to come 
to the Congress and lobby.
    Finally, the bill was passed in 1978 down the hall at the 
Government Operations Committee with two glaring no-audit parts 
of the bill. One is anything to do with monetary policy or 
international transactions at the Fed.
    Let me just talk one moment about those two areas. In the 
monetary policy area, there are tremendous opportunities to 
make billions of dollars on inside information from the many 
leaks of Fed monetary policy which I helped the committee 
investigate for many years. Let me just give you one little 
taste of it.
    First of all, then-Chairman Greenspan said after a number 
of leaks, when the newspapers were publishing what they had 
said the previous day in their secret meetings, that we are 
beginning to look like a bunch of buffoons. They had at those 
secret meetings at the Kansas City Fed, where I used to work, 
central bankers from Bulgaria, China, the Czech Republic, 
Hungary, Poland, Romania, and Russia attending and listening to 
interest rate information that they would not give the Congress 
at that time.
    Finally, the Federal Reserve decided that they would not 
like to have any more public minutes of their central 
policymaking committee. That was Arthur Burns in 1976 from a 
law then that was being passed, Government in the Sunshine Act, 
and a suit from a student at a university in Washington, D.C. 
So the Fed voted then in 1976, a 10-1 vote, that they would no 
longer have any transcripts of their central policymaking 
committee, and it was a 10-1 vote and the 17-year lie began.
    Finally, in 1992 I came back for the second time, and I 
spoke with the great Henry B., as we called him in his district 
in San Antonio: How could it be that the most powerful central 
bank in the world had no transcripts of its meetings that they 
used to send out? What happened to them? So, Mr. Gonzalez had 
all the Fed Presidents come. All but two showed up. Chairman 
Greenspan sat in the middle, right where I am sitting, Members 
of the Board of Governors on each side, and they misled the 
Congress.
    We put a lot of heat on them because they were Federal 
witnesses, and a few days later the Cleveland Fed broke and 
said, well, they had had a meeting 4 days earlier where they 
just decided how they would mislead the Congress. One person at 
that meeting, a staff person, a very good staff person who used 
to work with me at the Kansas City Fed, but he was assisting 
Greenspan, said, ``the Chairman is not highlighting these 
transcripts. We are not waving red flags.'' And when 
Congressman Maurice Hinchey had asked him at the hearing right 
here, ``Do you have any records?'' Greenspan replied, ``just 
some notes we keep.''
    After that, Greenspan sent a letter over here and said, 
this is 17 years later, we have those transcripts. I took a 
group of Republican and Democratic staffers over to the Board 
of Governors and found them right around the corner from 
Greenspan's office neatly typed. So they decided then that they 
would start issuing the transcripts again after a 5-year lag, 
much too long for timely accountability.
    After I left the committee, and went down to Texas, I read 
that they had decided in 1995 to shred the records of the 
Federal Open Market Committee. Those transcripts had been kept 
and sent to the National Archives, but they decided to destroy 
them. So I wrote a letter to Alan Greenspan asking why they 
were doing that, and his Vice Chairman, a very good person 
inside the Fed--these are good people; they just have bad 
policies--Donald Kohn, who worked there for many years and 
became Vice Chairman, started at the Kansas City Fed, he wrote 
to me saying yes, we decided to destroy the transcripts of the 
meetings, but we think it is legal.
    I just want to go through a few other things on the audits 
so you can get an idea of how bad the audits have been of the 
Fed, just two little points. One is the Los Angeles branch of 
the Kansas City Fed. You can ask me questions about it, when we 
found out that the auditing system there was corrupt. I took an 
excellent GAO team. Zoliason went in there and found that the 
system was completely corrupt. Greenspan admitted in a letter 
to the committee that they knew that the employees of the Fed 
had stolen at least $500,000 in the previous 10 years from the 
vault system of the 12 banks.
    One other thing, and then I will quit. The airplane fleet 
of the Fed, 50-plus airplanes, the audit there was a joke. 
There was no audit. The people running the fleet in Boston used 
to laugh about it. And they appeared here. Mr. Castle allowed 
them to come, and they were very courageous, and they talked 
about it right in the committee room here. Carolyn Maloney, 
Congresswoman Maloney, helped in investigating them. That was a 
completely corrupted thing. It was typified by their backup 
plane that the Fed paid for in Teterboro airport that didn't 
exist most of the time. That is all I am going to say about 
that.
    I have two other points. One is about paying off all the 
economists throughout academia on investigation of Henry B. 
Gonzalez; and what I consider malpractice, the present monetary 
policy of the Fed that was begun in October 2008 that has 
caused a lot of unemployment in the United States.
    [The prepared statement of Dr. Auerbach can be found on 
page 33 of the appendix.]
    Chairman Paul. Thank you.
    We will go to Dr. Calabria now.

  STATEMENT OF MARK A. CALABRIA, PH.D., DIRECTOR OF FINANCIAL 
               REGULATION STUDIES, CATO INSTITUTE

    Mr. Calabria. Chairman Paul, distinguished members of the 
subcommittee, I thank you for the invitation to appear at 
today's important hearing.
    As the subcommittee is well aware, the events of 2008 
witnessed not only unprecedented disruptions to our financial 
markets, but also extraordinary responses on the part of our 
financial regulators and central bank. No entity was more 
deeply involved than the Federal Reserve System, particularly 
the New York Federal Reserve. Yet the Fed has consistently and 
repeatedly resisted efforts to bring accountability and 
transparency to its actions.
    Congress and the public repeatedly warned that if details 
of the Fed's actions became public, further panic would ensue 
in our financial markets. Yet when that information, such as 
AIG's derivatives counterparties, finally did become public, 
disruptions were minimal or nonexistent.
    Despite some notable attempts by the Fed to increase its 
communications with the public, I believe, given its track 
record, the public cannot rely on the Fed to voluntarily 
provide us with sufficient information to monitor its 
activities and judge the effectiveness of its actions. While 
the requirements of the Dodd-Frank Act in relation to auditing 
the Fed's activities are an important advance, they fall far 
too short of providing sufficient oversight of the Federal 
Reserve.
    What auditing has been conducted so far has been focused on 
the Fed's response to the crisis. Accordingly, much of the 
audit requirements in Dodd-Frank have something of an 
historical feel about them. However, it is not enough just to 
get history right, although we are lucky if we do that, but 
also to ensure that future mistakes are avoided. I can think of 
few areas requiring as much mistake avoidance as monetary 
policy.
    The Fed's role in helping to create the crisis via its easy 
money policies in the aftermath of the dot.com bubble and the 
events of 9/11 remain largely uninvestigated by Congress. If we 
truly wish to end financial crises, then I believe it is 
absolutely essential that Congress receive a full and objective 
evaluation of the Fed's role in fostering the housing bubble, 
particularly as it relates to monetary policy decisions between 
2002 and 2005.
    Disagreement as to the appropriate stance of current 
monetary policy I think also demonstrates Congress' need for 
objective, independent analysis of monetary policy.
    Some might object that a GAO audit of the Fed subjects the 
Fed to political pressure. I think that such an objection 
ignores the simple fact that the GAO is not a political 
organization.
    As mentioned, I served as staff on the Banking Committee 
for a number of years. I can say through all of my interactions 
with GAO, they are independent, they are unbiased, they are 
nonpolitical. I have not always agreed with the conclusions of 
GAO, but I have never felt that any of those disagreements were 
the result of politics or bias.
    I think the subcommittee should also keep in mind that GAO 
exists for a very simple reason: that no Member of Congress or 
their staff are fully knowledgeable about the functioning of 
all the various government agencies. GAO simply exists to 
inform.
    I would argue that there are few areas less understood than 
monetary policy and macroeconomics. Hence, I would argue there 
are few areas more in need of an audit than monetary policy and 
macroeconomics. Again, the purpose of GAO here is to try to 
provide some information so that Members can more actively 
engage, I think, and more effectively engage in oversight of 
the Federal Reserve.
    Another objection to a GAO audit of the Fed is that such an 
audit would compromise the Fed's independence and subject it to 
political influence. I think such an objection confuses the 
very nature of Fed independence. The Fed's authority to 
regulate the value of money is one that is delegated from 
Congress. As Congress can and has legislated changes to the 
Fed, it should be beyond a doubt that the Fed is not 
independent of Congress; it is quite the opposite. It is a 
creature of Congress, and Congress has every right in that 
avenue to interject and regulate the activities of the Fed 
itself.
    Setting aside the debate of the desirability and legitimacy 
of so-called independent agencies, it should be clear that 
their independence in any operational sense is supposed to be 
from the Executive Branch, not from Congress. It should also be 
clear, however, that in recent years, the Federal Reserve has 
coordinated its actions quite closely with the Treasury 
Department, in my opinion eroding any independence from the 
Treasury. The revolving door, both at the political and career 
levels, between the Federal Reserve and the Treasury Department 
further undermines the Fed's operational independence. I 
believe a GAO audit would help shine light on this 
relationship, actually helping to insulate the Federal Reserve 
from continued interference by the Treasury Department.
    Again, the Dodd-Frank Act has made important advances in 
bringing transparency and accountability to the Federal 
Reserve. Unfortunately, it falls short in allowing Congress and 
the public to truly gauge the effectiveness of the Federal 
Reserve.
    In order to improve Federal Reserve transparency, I would 
suggest that Congress mandate a regular audit of all Federal 
Reserve activities, including monetary policy. Such audits 
could be performed in a manner so as to minimize the 
disruptions to any ongoing deliberations of the Federal Open 
Market Committee. For instance, these audits could be kept 
confidential for a short amount of time, 6 months, a year. That 
is certainly something that could be done not to try to unduly 
influence ongoing activities, but again, this audit should be 
made public at some point.
    I think it is also important to emphasize that evaluating 
the effectiveness of any government agency is made all the more 
difficult when that agency faces a variety of competing and 
sometimes conflicting objectives. If the Federal Reserve feels 
it is free to abandon price stability in order to achieve other 
objectives, such as rescue the financial industry or misguided 
attempts to influence the labor market, then I believe the 
value of an audit may potentially be very limited.
    At a minimum, Congress should consider restricting the 
Federal Reserve to a single goal, that of price stability. 
Congress should also restrict the ability of the Fed to have 
discretion implementing that goal. On a very basic level, a 
central bank that is free to define price stability or define 
its own objective is a central bank without any meaningful 
constraints.
    With that, again, I thank the chairman, I thank the 
subcommittee, and I look forward to your questions.
    Chairman Paul. Thank you very much.
    [The prepared statement of Dr. Calabria can be found on 
page 70 of the appendix.]
    Chairman Paul. I yield myself 5 minutes for questioning.
    My first question is for Dr. Calabria. I want you to follow 
up--I know you have talked about it in your statement--on this 
relationship of the Fed and the Treasury. You indicate that if 
there is to be any oversight or connection, it is more with the 
Congress than with the Executive Branch and the Treasury. Could 
you talk a little bit more about that, and exactly what you 
mean? And what has happened in the past that might suggest that 
we should be looking into the relationship of Treasury and the 
Fed and how that could be a negative, or why some people think 
it is a positive?
    Mr. Calabria. There are a variety of different things. I 
will most directly touch on first the negotiation, 
implementation of Dodd-Frank. Treasury was the point person in 
negotiating Dodd-Frank for the Administration, yet several of 
the senior advisors at Treasury representing the Administration 
were staff on loan from the Federal Reserve. So again, I think 
many of us remember there was about a whole 5 minutes during 
the Dodd-Frank negotiations where maybe there really were going 
to be serious constraints on the Federal Reserve, where there 
would be a serious examination of the bank supervision and 
regulatory powers. Again, I think the Congress and GAO should 
take a look at whether the Fed should be supervising banks in 
general, and whether that conflicts and provides any conflict 
of interest with the monetary policy decisions.
    But, having essentially Federal Reserve staff at Treasury 
negotiating on behalf of the Administration certainly, in my 
opinion, meant that there was going to be no chance that 
Congress was actually going to be able to peel back any of the 
powers of the Federal Reserve. So, again, the Treasury relies 
very heavily on Federal Reserve expertise and legislative 
decisionmaking.
    Most importantly, however, and it is important to keep in 
mind that Fed independence really came out of this Treasury-Fed 
accord where, prior to the 1960s, the Federal Reserve supported 
Treasury prices essentially and tried to maintain the price of 
long-term Treasurys in order so that the Treasury Department 
could more easily and more cheaply fund its activities. And 
again, if you have this relationship--and you see this 
particularly with the second round of quantitative easing where 
the amount that the Fed was purchasing on a monthly basis was 
coincidentally very close to the amount that was being issued 
by the Treasury. And so the extent that we go down that road of 
potentially ``monetarizing'' the debt, which I think is the 
ultimate concern, that you have the Treasury market supported 
by the Federal Reserve, which, of course, reduces discipline on 
not only the Treasury, but reduces discipline on Congress to 
get its fiscal house in order.
    So again, we rely on the markets to send us signals, and 
the Treasury market should be sending us a signal that we are 
headed towards a financial train wreck, but it is, of course, 
not, because the Federal Reserve is intervening in that market 
to reduce the price cycle that we would be receiving.
    So that is an important part of the debt market. I think it 
is ultimately one of the more important aspects of this, but, 
again, you also see it in financial regulation.
    I want to emphasize again the nature of independence is 
supposed to be not from Congress, but from the Executive 
Branch. There is a variety of literature, for instance, in 
economics that talks about a political business cycle where you 
would see the Federal Reserve try to loosen monetary policy in 
expectation of Presidential elections.
    Again, I would say that the empirical results in this 
literature are mixed, but, again, the emphasis is on the 
Administration. We know that in terms of any President's 
reelection, it is going to be far more important what the Fed 
does compared to what any Member of Congress wants. So again, 
there are far different interests and far different incentives 
in Congress, where you have a unified incentive in the 
Executive Branch.
    So, I would emphasize again the importance is to draw some 
independence from the Executive Branch and the Federal Reserve 
rather than from Congress.
    Chairman Paul. So just in summary, the way I understand 
that is when they talk about independence, they are really not 
talking about independence, they want to eliminate the role of 
the Congress, which you are arguing has a responsibility. So 
they want to be excluded from that supervision, but they don't 
want to be independent from the Treasury.
    What about political or private interest influence? When 
the bailouts came, there had to have been some special 
interests and political interests. Would that--could that be 
said to be not independent either, but influenced by not only 
the Treasury, but outside interests? Do you think there is 
much--should there be concern about that?
    Mr. Calabria. I think there should absolutely be strong 
concern about that on several levels. One could just look at 
monetary policy where monetary policy is conducted in 
partnership with the Federal Reserve's primary dealers in which 
it buys and sells Treasury securities with to conduct its 
monetary policy. Of course, if you are doing bank supervision, 
you have a financial crisis, and these primary dealers find 
themselves in trouble, the Federal Reserve has an incentive to 
try to essentially make sure that those primary dealers 
survive. And, of course, it doesn't want to make any of that 
public. I am sure you could ask any of the largest firms that 
were assisted. Whether it was Goldman or whether it was Societe 
Generale, they have not welcomed the attention that they have 
gotten when all of this information has come out.
    We heard a little bit earlier about the GAO report. One of 
the things that struck me is that if you look through the 
tables and you look through the information in the GAO report, 
regardless of the program, it is the same companies that keep 
repeatedly coming up. Repeatedly we see Citi, repeatedly we see 
Bank of America, repeatedly we see Morgan Stanley. Regardless 
of the program, it seems to be that the concentration of the 
benefits of these programs are with a handful of corporations. 
And, of course, those corporations, I think, do not want the 
public attention that they have repeatedly received incredible 
assistance from the Federal Reserve or credible assistance that 
has been off budget.
    So again, that relationship and that revolving door, we 
have seen it. And again, this is something that was talked 
about in Dodd-Frank, some of the governance issues. We all 
remember very much the role of Goldman essentially being the 
Chair of the Board at the New York Fed and some of the conflict 
of interest there. And certainly those were saying that the 
current president of New York Fed is a former Goldman employee. 
So not only am I concerned about the revolving door between 
Treasury and the Fed, I am also very concerned about the 
revolving door between Wall Street and the Fed.
    Chairman Paul. Thank you.
    I yield 5 minutes to Mr. Luetkemeyer from Missouri.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Dr. Auerbach, in your testimony you mentioned two or three 
things; the L.A. Fed whenever there was some corruption 
exposed, and some folks stole some money, the Federal 
airplane--the Federal Reserve airplane fleet. The audits that 
are being performed or should be performed, would they have 
caught these abuses?
    Mr. Auerbach. Did the audits have abuses?
    Mr. Luetkemeyer. Would the audits that are being proposed--
in other words, right now we have the Inspector General folks, 
or GAO, they are now doing the audit on the emergency loan 
program that was administered.
    Mr. Auerbach. Right. They don't touch any of these.
    Mr. Luetkemeyer. You are saying we should expand--
    Mr. Auerbach. Definitely.
    Mr. Luetkemeyer. --audit procedures because existing 
auditing procedures are not catching these things?
    Mr. Auerbach. Definitely. There are tremendous problems 
inside the Fed, and the in-house audits were no good at the 
Boston Fed. The courageous people there who testified right 
here about it said that someone came from upstairs at the 
Boston Fed near the harbor. Officials of the Fed are at the 
top; the people who run the airplane fleet were down below. 
Someone came down asking, is everything all right here? That 
was about the extent of the in-house audit.
    There were all kinds of corruptions, and so many 
corruptions that Henry Gonzalez, the Chairman, asked me to call 
the Janet Reno Justice Department, which I did, and they didn't 
want to get into it. Nobody likes to attack the Fed in 
Washington. So they said, call the Inspector General at the 
Fed, which I did, a very nice man, Brent Bowen, and he said, 
``I don't know if I have jurisdiction up in Boston.''
    And that is one of the major problems of the Fed and this 
new consumer protection agency that is located inside the Fed. 
The IG of the Federal Reserve is appointed by the head of the 
Federal Reserve, so how can they investigate these things? 
Chairman Bernanke cannot be investigated, and his officials are 
the people they appoint. This should be a Presidential 
appointment and an independent IG at the Fed, if you want to 
start cleaning up this mess.
    Mr. Luetkemeyer. Do you think there is anything that should 
be off limits whenever it comes to disclosure of the Fed 
activities?
    Mr. Auerbach. That is a very interesting question, because 
the Fed is now shredding their documents. But Arthur Burns, who 
was the head of the Fed back in the 1970s, he died in 1987, and 
he sent his transcripts of the meetings up to the University of 
Michigan, the Ford Library. They had people from the National 
Archives, professional archivists who took out anything that 
had to do anything with national security, personnel. They were 
lightly edited.
    So I was able to go up there and get copies of them all. 
They are very different from the kind of thing that the Fed 
issues. Ask any reporter who has received something from the 
Fed; it is mostly blanked out. This was a much better record.
    What should be done now is that the Fed should be told that 
they cannot destroy those records. The records go to the 
National Archives after 30 years. There will be somebody 
looking at that.
    And also on the FOIA requests, you should get professional 
archivists who know the rules in cooperation with the Fed 
instead of sending reporters blank pages.
    Mr. Luetkemeyer. Dr. Calabria, what do you think about 
that? Are there some things that you believe should not be 
disclosed or are off limits, or do you think everything is open 
to everybody?
    Mr. Calabria. I think the way I would look at it is the 
question of when should it be disclosed. Ultimately, any sort 
of deliberations, any sort of economic forecasts should be 
disclosed at some point. I would be comfortable having some 
sort of time lag.
    For instance, one of the things that Dodd-Frank does, and I 
think does correctly, despite much of what the bill doesn't do 
correctly, is require a disclosure of future discount window 
lending. And so the concern for the Federal Reserve would be if 
you disclose at the time that banks are coming to the discount 
window, that is a signal that such banks are weak, and I think 
that is a legitimate concern to raise.
    But I think if you--and again, in Dodd-Frank it allows up 
to a 2-year delay for that disclosure. I would prefer something 
closer to a year, but I do--I would say a 6-month, a year delay 
on something like discount window is legitimate in that it will 
not scare away people from using a discount window. Of course, 
we could have a totally separate discussion of whether this 
should be a lender of last resort in a discount window. But 
again, if you are going to have one, and you want it to be 
effective, a delay in disclosure in that, I think, is 
reasonable.
    A delay on disclosure on deliberations at the Federal Open 
Market Committee meetings, I think, is again reasonable. 
Ultimately, in a timely basis, all of this information should 
be made public, and I want to emphasize 5, 10 years is not 
timely. So again, we need to get it out in a reasonable amount 
of time.
    Mr. Luetkemeyer. Thank you. I yield back, Mr. Chairman.
    Chairman Paul. I thank the gentleman, and we will go into a 
second series of questions.
    This question is for Dr. Auerbach, and it has to do with 
what you talked about when you were trying get an audit in the 
1970s, and you didn't get too far in the Banking Committee even 
though it was the chairman of the Banking Committee who wanted 
to do it. Then they took it and they sent it over to the 
Government Operations Committee. And then when they gave the 
authority for the audit, it was actually exactly the opposite 
and closed that.
    I want you to expand on that. And also, why don't you tell 
me why it is that the individuals either in the Fed or see to 
it that their people get in the Fed, how come they have this 
much power that they are able to control even the Banking 
Committee chairman and then pass legislation exactly opposite 
of it? I think it was at that time that they really put into it 
to--seems like where the greatest protection is on these 
foreign operations, I think that is where there is a lot of 
mischief, and even now with our partial audit, we hear about 
it, but we don't know exactly what transpired. Could you expand 
on that a little bit?
    Mr. Auerbach. Sure. Let me take the second part first on 
international operations. You were right about the bill that 
was finally passed where the GAO is not allowed to go into 
anything that has to do with the operations, international 
operations, or monetary policy, trophies that remained on the 
shelf of the Fed for a long time.
    In international operations, when the Fed goes, for 
instance, and notifies brokers all over the world, brokers who 
are not investigated by anybody in the United States, and tells 
them, we want to buy, say, 5 billion in euros, that information 
is given to the brokers ahead of time. I am not saying the 
brokers are dishonest, but when there are billions at stake in 
these markets, they can place orders, or people in their office 
can place orders, long before the order is consummated.
    The chairman wrote to Alan Greenspan and asked, ``Why are 
you doing this? Why not just make an announcement that you are 
going in with 5 billion and let everybody in the market get in 
on it at the same time?'' And he wrote back, ``I think there is 
only about a 10-minute delay between the time we tell them to 
do it and they make these huge purchases. That is ample time to 
make a lot of money in the market. And so, the international 
operations should be audited by the GAO. It is really 
important, and I think when the Fed is going to do something, 
they should announce it.
    I disagree a little bit with Dr. Calabria. I would not 
leave these decisions for discount rate changes and for 
anything the Federal Open Market Committee does for more than 6 
months--even that is very long--because there have been so many 
leaks at the Fed. The FBI has been called in, all the rest. It 
is going to leak out anyway. There are several ways it leaks 
out. One is when we asked how many people at the Fed know about 
these secret interest rate decisions, we got a whole bunch of 
pages, single-spaced, of hundreds of people all over the 
country on these conference calls. And as Greenspan reported, 
he was saying he opens the Singapore edition of the Wall Street 
Journal and found out what the Fed did at their meetings 
before. So you can't tie up information that is so valuable for 
months that just benefits inside traders. And those trophies, 
when they did go over and put them in there, it kept the GAO 
out of a lot of the problems.
    Can I say one other thing that I think is important? We 
have sitting in the audience Walter Charlton, who has had suits 
against the GAO since 1983 because the GAO has had a policy, 
alleged policy against older workers. I had excellent GAO 
people who were at the Los Angeles Fed who did the audits. They 
were excellent. They were old-timers at the GAO who knew how a 
central bank works, and knew what to get into and what to look 
at.
    The suits now in the courts all these years, some of them 
have been adjudicated. The suits allege that they try to get 
rid of the older people. In a recent suit, I gather that after 
a joint session of Congress, 200 were rehired by the GAO. But 
they try to get rid of the older people, people who are 55 or 
older, around there, and hire young people. And I know they 
hire young people, because I used to have lunch with David 
Walker when he came to the LBJ school to get some of our 
excellent young students, but that lowers the amount they have 
to pay the people by a huge amount.
    But what we need in the GAO are experienced auditors who 
know how central banks work and can get in there and really 
find out what is going on. That takes a lot of training to find 
out how to audit a vault facility.
    The vault facility, since we found that team that was in 
there that I worked with, was excellent. They found out what 
was missing. It was just awful. The main ledger, the vault on 
the computer, everybody could get in there without a password. 
What happened to those officials when that went public? Nothing 
has happened since then at the Fed.
    I think it is very important to get better GAO auditors--
now, maybe they have them--who are experienced on how to audit 
a huge, enormous central bank with 20,000 employees. And they 
have vaults all over the country that hold all the money for 
the commercial banks, and the Bureau of Engraving ships it 
there. All the new money is in there also. It is a national 
security problem, and if Greenspan thought that the employees 
were stealing $500,000 in 10 years--we thought that was a 
tremendous understatement and so did the GAO crew--but I 
believe shortly thereafter, most of them were no longer at the 
GAO.
    Chairman Paul. Thank you.
    I yield 5 minutes to Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    I have a feeling that both of you gentlemen have a lot more 
to say and a lot more suggestions for us, so I think I will 
just use my time a little differently this time.
    Dr. Calabria, you were the Director of Financial Regulatory 
Studies. What one regulation would you suggest would be 
impactful. Audit the full Fed? Is there something else that you 
see that would really protect our monetary system and really 
make an impact? What would be your suggestion?
    Mr. Calabria. I think the focus really needs to be on 
defining and limiting the discretion for the Fed on price 
stability. So, again, you can do things like reduce--eliminate 
the dual mandate, having some sort of inflation targeting.
    I would emphasize that ultimately what is going to be a 
constraint on the Fed is some sort of competition, so obviously 
encouraging alternative monetary mechanisms is something we 
should be looking at the in the long run, but certainly trying 
to find a way to constrain the Fed. So I would have a full 
audit. I would get rid of the dual mandates. I would put some 
statutory flesh around what exactly price stability means, 
because again, you can get rid of the dual mandate, but if the 
Fed decides that price stability is 3 or 4 percent, it doesn't 
really matter. You have to take some of these definitions back 
into Congress.
    And again, I want to emphasize one of the reasons I think 
the Federal Reserve has been so effective over the years at 
thwarting Congress is that they come up here and they give you 
all this gobbledygook about M1, M2, and all this, and they try 
to confuse you. Again, the most important thing is to get 
information out there so that Members of Congress can even 
start with the very right questions and can push them and 
basically not let them get around that. So the most important 
thing we can do is educate Congress and the public on how 
exactly monetary policy works.
    Mr. Luetkemeyer. Very good. I asked for one, and got three. 
Must be D.C. Thank you.
    Dr. Auerbach, with regard to the same question, you have 
had a lot of advice for us in some of your previous comments 
here. What piece of advice or regulation would you suggest?
    Mr. Auerbach. Price stability is certainly important, but 
the Fed should understand it is the 1949 Employment Act that 
said they have to do full employment also; that price stability 
helps produce full employment. And right now we have quite a 
bit of inflation. Year over year, 1 month it was 4 percent, 
then 5 percent. Then Chairman Bernanke testified that he 
doesn't see any inflation. How high does it have to go before 
he sees it? That is year-over-year inflation.
    The other thing that I think that Congress should have 
something to say about is what I call malpractice at the Fed. 
In September 2008, when Lehman Brothers collapsed and the 
markets went crazy all over the world, one month later, the Fed 
decided that they would start paying the banks interest in 
order for them to hold their reserves.
    I have that diagram--I wonder if you would put it up--of 
the amount of--there it is. The amount of excess reserve. You 
will notice that since--this is the Federal Reserve of St. 
Louis. It is zero. All of a sudden in 2010, the banks are 
intelligent. They say, look, we can get a quarter percent 
interest risk-free from the Fed; why should we loan it to 
businesses?
    So the Fed begins pumping in their monetary base, they 
pumped in $1.9 trillion. How much of that got out for loans to 
banks and to businesses? $1.7 trillion was parked as excess 
reserves. It is there today. The total today is $1.6 trillion 
in excess reserves. It went through the roof.
    We are in a position today where people inside the Fed, 
economists inside the Fed, like William Gavin, a great 
economist at the St. Louis Fed, published in their literature 
for the banks it is a much better investment to hold the money 
as excess reserves, tie it up, than to lend it out to people, 
because they get a quarter percent for sure, and we are in a 
terrible environment.
    What should be done immediately? I call this malpractice. 
It has certainly increased unemployment in the United States. 
The Fed must stop paying the banks to hold reserves instead of 
lending it to businesses. And if they do that, they have to be 
very careful that the money supply doesn't balloon out or we 
will have a huge inflation. They will have to slightly raise 
their target interest rate to about a half percent. They should 
be doing that. They have been at zero long enough, and you can 
see what good that has done for the country.
    Mr. Luetkemeyer. Thank you very much. I yield back.
    Chairman Paul. Thank you.
    I have one more question for the two of you. We talk about 
the transparency, and how to get information out, and how 
dangerous it is if someone gets the information, they can make 
some money on it because they anticipate what the market will 
do. And also, there is so often the unintended consequences of 
manipulating what they do, the economic consequences. And we 
talk and discuss, and there was a slight disagreement on 
exactly when we release information, when did the Fed do this, 
and when do we get a record of the history.
    My question is a little bit different. It has actually to 
do with monetary policy per se, not how we tell--how the Fed 
manages monetary policy. My viewpoint, they have had two 
mandates, full employment, and I don't think either one of you 
enjoy that. If you really look at the old-fashioned way of 
measuring it, it is probably over 20 percent. Dr. Auerbach 
admitted that price stability, they are not doing very well 
there. But I got the indication from both of you that it wasn't 
the principle of setting the interest rates, it is how they do 
it, and when it is released, and the details of it.
    But what about the question of whether or not they should 
be messing around with interest rates? Most economists these 
days, ever since the 1970s, they have played down wage and 
price controls. Wage and price controls aren't very good as a 
solution to solve the problem of price inflation created by too 
much money.
    But setting interest rates is a pretty big deal. If 
interest rates--if prices are the signal that tells the 
businessman what to do and the consumer what to do, the supply 
and demand--and, of course, free-market economists predicted 
that socialism would absolutely fail without a pricing 
structure--why is it that we have accepted this idea that the 
Fed is all-knowing with their record?
    So could you each tell me, do you think it would be bad to 
have a system where the Fed wasn't involved with setting 
interest rates, and maybe market rates would help? Maybe market 
rates would help savings. Maybe interest rates would go up, and 
the people who tend not to want to gamble in the stock market 
and the bond market, wouldn't this be a help to the economy? 
Could both of you make a comment about whether or not the Fed 
should be setting interest rates?
    Mr. Auerbach. I think that is a really good question. In 
1979, we had a little party right here in this room, and the 
new Chairman was coming on board. He was a very good Chairman, 
Chairman Volcker. And at that time, by 1980, the inflation of 
the United States was going over 13 percent. Interest rates 
went up over 20 percent. There were mass bankruptcies in the 
country. And Volcker was laughing with us and said to two of us 
from the University of Chicago, you give me a pain in my you 
know what, and we laughed together. But then Volcker decided he 
wouldn't control interest rates, he would control the money 
supply and stop printing so much money, which he did. He paid a 
big price, but he stopped the country from going into a 
terrible inflation. I was in the Reagan Administration, and we 
had a double-dip recession, 10 percent unemployed, but then we 
had a long period of no inflation. So he did a great job, but 
we paid a terrible price.
    But when Alan Greenspan came in, the idea of controlling 
the money supply was considered, oh, that is University of 
Chicago ``monetarists,'' and they don't know what they are 
doing. So by the end of the 1980s, he decided the Fed would no 
longer target money. He would do what other central banks do: 
just target the interest rates.
    And I think they should do both. They should watch the 
money supply, but they should do what Congressman Paul said: 
try to let the interest rates go to market rates instead of 
sitting on them.
    Mr. Calabria. I would start by saying that I believe there 
is probably no more important price in the economy than the 
interest rate. You really do balance savings investment and you 
balance time preferences. Accordingly, when we get that wrong, 
we get a whole lot wrong, and you can have all sorts of 
disruptions to the economy. So ultimately, the answer should be 
a very strong ``no,'' we should not have the Fed manipulating 
what is the most important price in the economy.
    Chairman Paul. I thank the panel for appearing. The Chair 
notes that some of the members may have additional questions 
for the first and second panel of witnesses which they may wish 
to submit in writing. Without objection, the hearing record 
will remain open for 30 days for members to submit written 
questions to these witnesses and to place their responses in 
the record.
    This committee is now adjourned.
    [Whereupon, at 11:40 a.m., the hearing was adjourned.]








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                            October 4, 2011






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