[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
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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.]
A P P E N D I X
October 4, 2011