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

                        THE PRICE OF MONEY: CONSEQUENCES
                         OF THE FEDERAL RESERVE'S ZERO
                              INTEREST RATE POLICY

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

                                    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

                                 SECOND SESSION

                                   __________

                               SEPTEMBER 21, 2012

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 112-160

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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
    KEVIN McCARTHY, California           BRAD MILLER, North Carolina
    STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
    BILL POSEY, Florida                  AL GREEN, Texas
    MICHAEL G. FITZPATRICK,              EMANUEL CLEAVER, Missouri
        Pennsylvania                     GWEN MOORE, Wisconsin
    LYNN A. WESTMORELAND, Georgia        KEITH ELLISON, Minnesota
    BLAINE LUETKEMEYER, Missouri         ED PERLMUTTER, Colorado
    BILL HUIZENGA, Michigan              JOE DONNELLY, Indiana
    SEAN P. DUFFY, Wisconsin             ANDRE CARSON, Indiana
    NAN A. S. HAYWORTH, New York         JAMES A. HIMES, Connecticut
    JAMES B. RENACCI, Ohio               GARY C. PETERS, Michigan
    ROBERT HURT, Virginia                JOHN C. CARNEY, Jr., Delaware
    ROBERT J. DOLD, Illinois
    DAVID SCHWEIKERT, Arizona
    MICHAEL G. GRIMM, New York
    FRANCISCO R. CANSECO, Texas
    STEVE STIVERS, Ohio
    STEPHEN LEE FINCHER, Tennessee
    FRANK C. GUINTA, New Hampshire

               James H. Clinger, Staff Director and Chief Counsel
            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:
        September 21, 2012...........................................     1
    Appendix:
        September 21, 2012...........................................    19

                                   WITNESSES
                           Friday, September 21, 2012

    Grant, James, Editor, Grant's Interest Rate Observer.............     5
    Lehrman, Lewis E., Chairman, The Lehrman Institute...............     6

                                    APPENDIX

    Prepared statements:
        Paul, Hon. Ron...............................................    20
        Grant, James.................................................    22
        Lehrman, Lewis E.............................................    27

                        THE PRICE OF MONEY: CONSEQUENCES
                         OF THE FEDERAL RESERVE'S ZERO
                              INTEREST RATE POLICY

                                  ----------

                           Friday, September 21, 2012

                 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 9:33 a.m., in
    room 2128, Rayburn House Office Building, Hon. Ron Paul
    [chairman of the subcommittee] presiding.
        Members present: Representatives Paul, Jones, Lucas,
    Luetkemeyer, Huizenga, and Schweikert.
        Chairman Paul. This hearing will come to order. And without
    objection, all Members' opening statements will be made a part
    of the record.
        I want to welcome our two witnesses here today, and I will
    now recognize myself for 5 minutes to make an opening
    statement.
        Today, we are emphasizing the importance of interest rates.
    In a free market, interest rates are crucial. It is a crucial
    bit of information that tells a lot of people what to do,
    whether it is the investors, the savers, the spenders,
    consumers, whatever.
        But once it is interfered with and interest rates are
    artificial, it tends to mess things up.
        We talk a lot about monetary policy and the soundness of
    the dollar and the spending and monetizing of debt. Today, we
    are more or less concentrating on that aspect of monetary
    policy that deals with interest rates--how important is it--and
    has that whole emphasis on interest rates and this concession
    through the Federal Reserve (the Fed) that they have a duty and
    sometimes an unregulated duty to pretend they know what the
    interest rates should be.
        This opens up a lot of questions. Who benefits and who
    suffers from this? Has it done any good? Is it a worthy effort
    even to try to pretend that we know what interest rates should
    be? And figure out exactly how much difficulty it has caused.
        From my viewpoint, I think that, from the viewpoint of the
    marketplace--just as all prices, I want the market to set these
    prices. And we have been living now with a Federal Reserve for
    100 years, and early on, they were manipulating interest rates.
        It is hard to manipulate the supply of money or be the
    lender of last resort without getting involved in interest
    rates. And it is usually done with either trying to prevent a
    problem or to solve a problem.
        But if we look at history, especially in our last 100
    years, we have had a lot of ups and downs. It hasn't been
    smooth sailing. The Federal Reserve is supposed to be providing
    for a sound dollar and making sure that prices are stable and
    that there is high employment.
        And yet the results that we see today, because they have
    pursued this almost obsession on believing that they can leap
    over into a central economic planning through the manipulation
    of money and credit, and in particular interest rates, we have
    ended up with some pretty poor results.
        So I am working under the assumption that we are in a
    period of time probably unparalleled in our history, possibly
    unparalleled in the history of the world, because we have never
    had quite the global economy involved like we have today and we
    have never had a single fiat currency for 30, 40 years being
    used as the reserve currency of the world. So I think the
    distortions now are so great.
        And if it is indeed true that the concentration on interest
    rates might be the culprit, it would be good to get it exposed,
    so that when the time comes when it becomes an absolute
    necessity to try to correct this problem, we might be able to
    put a better system together.
        So I am delighted today that we have been able to bring two
    individuals who are very well-versed on this subject to talk
    about this, and other members of the committee, to emphasize
    the importance of price fixing of money.
        Some people don't like to call it price fixing and they
    refer to it as something in interest. But in a way, it is easy
    to understand it is a price fixing.
        Price fixing is bad when we have wage and price controls.
    Not many people are advocating wage and price controls at the
    moment, even though there is a lot of that going on in a subtle
    way, if money is one-half, the currency is one-half of every
    transaction and you have some price fixing involved in the
    price of money, it can be a fairly significant event that
    should be exposed, and we certainly ought to recognize that as
    we move into that period of time when there is a necessity for
    monetary reform.
        So I am delighted that we have had this opportunity to
    further this discussion.
        I would now like to yield 5 minutes to the gentleman from
    North Carolina, Walter Jones.
        Mr. Jones. Mr. Chairman, thank you. And I won't take but 1
    or 2 minutes. I want to thank you again for your national
    leadership on this area of monetary policy and concerns of
    where this country is going.
        And to our witnesses today, thank you very much. I look
    forward to listening to your comments.
        I don't think there is a better time, when we are going
    home for the next 5 weeks, all of us in the United States
    Congress, to be with the people. And knowing that I am from
    eastern North Carolina and the concern about the actions of the
    Federal Reserve, I think the topic today is absolutely
    fascinating and critical.
        So I just want to say to you, Mr. Chairman, thank you very
    much for holding this hearing, and I look forward to listening
    to the witnesses and thank them for being here. And just thank
    you for your service to our Nation.
        I yield back.
        Chairman Paul. I thank the gentleman.
        I now yield time to Mr. Lucas from Oklahoma.
        Mr. Lucas. Thank you, Mr. Chairman. And as all of the
    hearings that you have called in your tenure as a subcommittee
    chairman reflect, this is an important subject matter and
    something on which we all need to focus. Perhaps not quite as
    exciting to the membership, as one can tell, as it should be,
    but nonetheless it cuts to the very basis of how our free
    market system works in this country.
        That said, let me reminisce for just a moment, since this
    session of Congress is beginning to wind down, and there is
    always a possibility this might be the last hearing of this
    subcommittee. I suspect we might be around after Election Day,
    but a lame duck session is to be avoided if it is humanly
    possible.
        I would just simply note that--having sat next to you on
    this dais on the full committee and served on your subcommittee
    for almost a decade now--we have had many a good policy
    discussion, and not just monetary policy, but we have discussed
    the intricacies of farm policy, agricultural economics.
        It might surprise some of you to know that Dr. Paul and I,
    while we agree on many, many, many things, we are not exactly
    in sync on agricultural economics. But we have had some lovely,
    very thoughtful, to-the-point discussions, and you have opened
    my mind in an area or two, and I appreciate that. And I hope
    perhaps even on an occasion or two, I have offered a thought
    for you to think about. But you have just been a pleasure.
        And if Congress is about free elections, and an open and
    thoughtful debate process where policies can be formulated in
    the best interest of the country, then I think you have done
    more than your part, and we will all be ever so appreciative of
    that for many, many years to come.
        And with that, thank you, Mr. Chairman.
        Chairman Paul. I thank the gentleman.
        And now, I yield time to Mr. Luetkemeyer from Missouri.
        Mr. Luetkemeyer. Thank you, Mr. Chairman. I add my
    congratulations and empathies from Chairman Lucas as well. It
    has been an honor to serve with you these past 2 years.
        The subject we have today I think is extremely important
    from the standpoint that the Fed continues to tinker around
    with our economy through the money supply, and, from all things
    that I see, it is having minimal success. I am concerned about
    the direction that they are going, the situation that they are
    putting us in.
        If you look at the global situation, other entities,
    central banks around the world, they are struggling. And is
    this the proper path to take? I don't know, I am not an
    economist, and I think there is a general disagreement even
    with good economists on whether it is a good policy or a bad
    policy.
        But I think that the discussion is pertinent, extremely
    important to today's economic welfare from the standpoint that
    we are in an economic stagnation period here, and how we get
    out of this is everybody's concern.
        And I think monetary policy by the Fed and their money-
    supply policy is an extremely important subject to discuss.
        So with that, I thank you for the subject today, Mr.
    Chairman, and I yield back.
        Chairman Paul. I thank the gentleman.
        Now, I yield time to Mr. Schweikert from Arizona.
        Mr. Schweikert. Thank you, Mr. Chairman. I will be very
    quick.
        You do realize that you letting me on this subcommittee has
    really screwed up my subjects of reading over the last 2 years.
    All of a sudden, I find myself reading more about monetary
    policy than I ever thought I would want to touch. And I have
    learned a lot. I have also worked through a series of things
    that I realize are just sort of complete folklore out there.
        And, Mr. Chairman, I am hoping also in our testimony and in
    some of the discussion, I am one of those who is absolutely
    fixated on the concept that interest rates ultimately are the
    pricing of risk and where interest rates and capital flows, and
    then that interest rate charged to where that capital flowed is
    sort of an allocation and a management of risk.
        Do you end up moving large amounts of capital, or even
    sometimes, us as individuals, capital to places that it
    shouldn't be because it is misallocated and mispriced? And what
    are the ultimate consequences for what we have done here when
    we have basically destroyed what should have been the
    historical pricing mechanism or risk mitigation, risk analysis
    system, which is interest rates and our economy.
        And with that, Mr. Chairman, I look forward to the
    testimony.
        Chairman Paul. I thank the gentleman.
        We will now proceed to our witnesses.
        First, Mr. James Grant is a noted investor and founder and
    editor of Grant's Interest Rate Observer, a widely circulated
    bimonthly newsletter on finance that accurately foresaw the
    financial crisis.
        A former columnist from Barron's, he is the author of five
    books on finance and financial history. Mr. Grant has appeared
    on television programs such as ``60 Minutes'' and ``The Charlie
    Rose Show'' to share his expert knowledge of finance, and his
    journalism has been featured in numerous publications,
    including The Wall Street Journal, the Financial Times, and
    Foreign Affairs.
        Second, Mr. Lewis Lehrman is a senior partner of the
    investment firm L.E. Lehrman & Co., and is chairman of the
    Lehrman Institute, a public policy organization he founded in
    1972, where he heads up the Gold Standard Now Project.
        As a member of President Ronald Reagan's Gold Commission,
    Mr. Lehrman helped write the Commission's minority report
    entitled, ``The Case for Gold.''
        Over the years, he has written widely about economic and
    monetary policies and has been featured in Harper's, The
    Washington Post, and The New York Times, among others.
        Without objection, your written statements will be made a
    part of the record. You will each now be recognized for a 5-
    minute summary of your testimony.
        Mr. Grant?

        STATEMENT OF JAMES GRANT, EDITOR, GRANT'S INTEREST RATE
                                OBSERVER

        Mr. Grant. Mr. Chairman, and members of the subcommittee,
    good morning. It is an honor and a pleasure, and may I
    underscore honor to be here.
        The price mechanism is our indispensable contrivance, and
    without it, the store shelves would be stocked with things we
    don't want, if they would be stocked at all. Our economy is
    wondrously complex, and what coordinates the moving parts is
    Adam Smith's invisible hand.
        For a superb critique of the perils of price control, look
    no further than Ben Bernanke's own lectures last March to the
    students of George Washington University. ``As you know,'' the
    chairman reminded his charges, ``prices are the thermostat of
    an economy; they are the mechanism by which an economy
    functions. So putting controls on wages and prices,'' here Mr.
    Bernanke was referring to the disastrous Nixon experiment of
    the early 1970s, ``meant that there were all kinds of shortages
    and other problems throughout the economy.''
        Yet this same observant critic is today leading the Fed in
    a policy of financial price control, to call the thing by its
    name. Interest rates are, after all, prices. They convey
    information, or are intended to. Market-determined interest
    rates are the prices that balance the supply of savings with
    the demand for savings.
        These, however, are not our interest rates. Actually, we
    hardly have any. They are so small you can hardly see them.
    They are tiny. Today, the Federal Reserve imposes interest
    rates, and those rates it does not impose, it heavily
    influences.
        Mr. Bernanke's bank fixes at zero percent the basic money
    market interest rates called the Federal funds rate that
    manipulates the alignment of rates over time, the yield curve,
    and it has its fingerprints all over the relationship between
    government yields on the one hand, and the yields attached to
    private claims on the other.
        The Federal Reserve has decreed that ultra-low interest
    rates are a necessary if not sufficient condition for economic
    recovery. It says that miniature interest rates will boost
    hiring and another aspiration of the central bank, keep
    consumer prices rising by just enough; ``a decent minimum, say,
    of 2 percent a year,'' so says the Fed.
        Now, every market intervention has consequences, but not
    necessarily the consequences that the intervening authority
    intended. In the nature of things, there can be no predicting
    exactly what will come of today's radical and indeed
    unprecedented monetary policies.
        Mr. Bernanke himself makes no bones about it in his widely
    scrutinized speech at Jackson Hole, Wyoming, on August 31st. He
    used the phrase, ``learning by doing.'' Indubitably the Fed is
    doing, nobody can doubt its manic energies, but it seems not to
    be learning.
        Artificially low interest rates must inevitably subsidize
    speculation at the expense of saving. It must raise up the
    prices of stocks and commodities, but only temporarily. It must
    enrich the asset holders and inadvertently punish the wage
    earner. It must advantage one class of financial institutions--
    say, banks--over another--say, life insurance companies. It
    must disturb the currency markets, and therefore interfere with
    international trade, and it must conflate our understanding of
    the strength of the Treasury's own finances.
        This year, in the just-ending fiscal year--or the soon to
    end--the interest cost in the debt will run to an estimated
    $125 billion. That happens to be slightly lower than the outlay
    the Treasury bore in 2006 when the debt was 58 percent smaller
    than it is today, but when the average interest rate was a
    towering 4.8 percent as opposed to the current average of 2.1
    percent.
        Ultra-low rates flatter the Nation's credit profile, yet
    that credit profile remains the same.
        Mr. Chairman, millions of Americans are earning nothing on
    their savings. Having nowhere else to turn, they are investing
    in richly priced corporate debt, some of that speculative
    grade. The Fed author of this interest-rate famine of ours has
    inadvertently created a paradox that would be funny if it
    weren't dangerous.
        Mr. Bernanke's bank has created a high-yield bond market,
    junk bonds to the cognoscenti, but a market lacking one
    customary attribute of high-yield security. That is, the Fed
    has created a high-yield bond market without the yield.
        I thank you.
        [The prepared statement of Mr. Grant can be found on page
    22 of the appendix.]
        Chairman Paul. Mr. Lehrman, go ahead.

     STATEMENT OF LEWIS E. LEHRMAN, CHAIRMAN, THE LEHRMAN INSTITUTE

        Mr. Lehrman. So, Mr. Grant and I like to switch one
    sentence to express how much we honor the extraordinary record
    of the chairman in his 30 years plus, perhaps, service in the
    Congress. It has been a heroic effort on behalf of the
    authentic Constitution, and on behalf of the liberties which we
    have inherited from our forefathers, and of course, for sound
    money.
        Now, Mr. Grant is about six feet, five inches tall. I am
    only five feet, 10 inches tall, and he determined the protocol
    of our presentation. So, he established that he would focus on
    the problem, and I should spend a moment or two on the
    solution.
        Indeed, Jim has described the consequences of Federal
    Reserve quantitative easing and interest rate manipulation and
    suppression.
        From Mr. Grant's analysis, one concludes that the Fed's
    unlimited power to purchase Treasury debt and financial market
    securities not only funds the Treasury deficit with newly
    printed money, but the Fed's market intervention process also
    makes of the financial class a special interest group of
    privileged investors and speculators, because of their special
    access to subsidized funds at near zero interest rates, while
    middle-income families depend upon their credit card balances
    and pay upwards of 20 percent or more.
        A well-connected financial class subsidized by the Federal
    Reserve is a crucial cause of increasing inequality of wealth
    in America. In this regard, I would cite only one fact for the
    Monetary Policy Subcommittee to contemplate. Since the
    termination of dollar convertibility to gold in 1971, a mere
    generation, the financial sector has doubled in size as a share
    of the American economy, but the manufacturing sector has been
    cut in half.
        Only comprehensive reform of the Fed and termination of the
    Reserve currency role of the dollar will arrest this trend. For
    example in 2002, Mr. Bernanke described the Fed's extraordinary
    power to create new money and credit in our present financial
    regime of inconvertible paper money and inconvertible bank
    deposit money.
        I quote Mr. Bernanke, ``Under a fiat paper-money system, a
    government, the central bank in cooperation with other
    agencies, should always be able to generate increased nominal
    spending and inflation. Even when the short-term nominal
    interest rate is at zero, the U.S. Government has a
    technology,'' Bernanke continues, ``called a printing press, or
    today its electronic equivalent that allows it to produce as
    many U.S. dollars as it wishes at essentially no cost.''
        Reading this, I don't know whether to laugh or to cry. In
    effect, as James Grant wrote elsewhere, ``The Fed is not only
    the American central bank, but with this exalted power to print
    money, the Fed is now the government's central planner.''
        During the Volcker years, from 1979 to 1987, Fed interest
    rate manipulation was justified as the means to end inflation.
    By 1994, employment as a Fed target had all but disappeared
    from the minutes of Fed meetings.
        Now, in 2012, despite inflation being again on the rise,
    employment is as a practical matter the sole target of
    quantitative easing. The Fed and its apologists in the media
    and the academy justify quantitative easing and its unlimited
    scope and duration as the way to restore economic growth--
    surely, an extra-Constitutional form of fiscal spending through
    Federal Reserve capital allocation reserved for the Congress of
    the United States.
        But as soon as one examines that Federal Reserve balance
    sheet, which if I may say so, few politicians do, one sees that
    the Fed primarily buys Treasury securities and mortgage-backed
    securities. In effect, a subsidy by which to finance the
    government deficit, and to refinance bank balance sheets that
    is to say the promotion of more financial and consumption
    sector growth. In a word, quantitative easing is the most
    pernicious form of trickle-down economics.
        Now, the problem of the American economy is neither under-
    consumption nor is it under-banking. The problem is the lack of
    rapidly growing investment in domestic production and
    manufacturing.
        The investment is the necessary means by which to enable
    our producers to lead in both domestic and global markets. It
    is rapidly increasing investment and production growth which
    begets employment growth and with it healthy unsubsidized
    consumption growth, not by means of transfer payments.
        It is a truth of economic theory and practice that rising
    personal and family real income grows from increasing per
    capita investment in innovative businesses; new plant, new
    equipment. So the question is, in reforming the Fed, how can
    our runaway central bank be harnessed by the financial markets
    to target the goal of economic growth through increased
    productive investment, not the promotion of consumption and
    Treasury deficit financing by means of interest rate
    manipulation and quantitative easing?
        The answer, I believe, is transparent. The Congress of the
    United States has the exclusive constitutional power under
    Article I, Sections 8 and 10, not only to establish the
    definition of the dollar, but Congress also has the power to
    define by statute the eligible collateral that the Federal
    Reserve may buy and hold against the issue of new money and
    credit.
        Thus, a simple congressional statute defining sound
    commercial loans as the primary eligible collateral for
    discounts and new credit from the Fed would have two primary
    defects. First, it should rule out Fed purchases of Treasuries,
    thus requiring the government to finance its deficits not with
    newly printed Fed money, but instead in the open market away
    from the banks.
        Second, the Fed would then become a growth-oriented central
    bank by which to finance productive business loans, encouraging
    thereby commercial banks themselves to make banks to solvent
    businesses in order to sustain economic and employment growth.
        Now, why is this the case? Commercial banks would focus on
    production and commercial loans because solvent loans, instead
    of Treasury debt, could then be used by commercial banks as the
    primary eligible collateral by which to secure credit from the
    Fed as the lender of last resort. In a word, Treasury subsidies
    by the Fed should be displaced by productive business loans
    oriented toward economic and employment growth.
        Mr. Chairman, this simple proposed reform of Fed operations
    was the very monetary policy insisted upon by Carter Glass, a
    leading Democrat who was the chief sponsor of the Federal
    Reserve Act of 1913. The congressional legislative leaders who
    created, indeed founded, the Federal Reserve System of 1913
    designed the Fed by law to enable steady commercial investment
    and employment growth.
        The Federal Reserve Act was also designed explicitly to
    uphold and maintain dollar convertible to gold in order to
    maintain a reasonably stable general price level. Now, such a
    congressional Federal Reserve reform today, consistent with the
    original Federal Reserve Act, would require no further
    legislative mandate to sustain employment growth and to rule
    out systemic inflation and deflation.
        Just a word more--so today, the Fed reiterates at every
    meeting that it, the central bank, must manage and manipulate
    interest rates to fulfill a congressional mandate to maintain
    reasonable price stability and reasonably full employment. But
    the best way to do this is to remobilize the express intent and
    the techniques of the original Federal Reserve Act, namely the
    statutory requirement that the Fed uphold the classical gold
    standard and, as was intended by the original Federal Reserve
    Act, to substitute commercial market credit for Treasury debt
    as the primary eligible collateral for bank loans from the
    lender of last resort, the Federal Reserve System.
        Mr. Chairman, may I say with respect, Congress has
    defaulted to the Federal Reserve System its sole and solemn
    constitutional authority to define and to regulate the value of
    the dollar and to define the vital economic use of eligible
    collateral by which to obtain productive business loans from
    the Federal Reserve System. It does not have to be this way.
        Thank you very much.
        [The prepared statement of Mr. Lehrman can be found on page
    27 of the appendix.]
        Chairman Paul. Thank you.
        We will go into the questioning session right now. I yield
    myself 5 minutes.
        I want to ask both of you the same question. In 1979, and
    the 1980s, we had a bit of a crisis, quite different than we
    have today because interest rates were very, very high and even
    made higher. At that time, as I recall, not too many people
    were happy and claiming they were getting benefits from the
    higher interest rates. I don't think the markets--the higher
    the rates went, I don't think the markets were saying
    ``wonderful, wonderful.''
        But today, even with this most recent announcement of the
    accelerated quantitative easing, there is almost an immediate
    response--as a matter of fact, instantaneous response. We are
    going to print a lot more money and those individuals who are
    holding stocks seem to be delighted with that and bonds rally.
        My question is: Under today's circumstances, with this
    constant effort to keep lowering interest rates, now that they
    are down to essentially zero, below zero when you talk about
    real interest rates, who benefits from this? Who is really
    benefiting? And who are the people who are suffering? Can you
    divide it up and find out if there are some groups who have no
    benefit whatsoever and some people actually get punished? And
    other people are rewarded, whether it is temporary or not, at
    least they think they are being rewarded.
        And if there is a case where somebody benefits, and
    somebody else is hurt, is this done on purpose? Or would you
    want to make a stab at it to say is this sort of a consequence
    of just bad policy? Or what might be the motivation here if
    there are winners and losers?
        Mr. Grant?
        Mr. Grant. Mr. Chairman, the great French economist
    Frederic Bastiat talked about that which is seen and that which
    is not seen. There are many obvious beneficiaries. There are
    many obvious victims. Let me suggest a subtler distortion that
    these policies are responsible for, and then I will touch on
    some of the ones that are perhaps as important or more so.
        Capitalism is a little like the forest floor. There is
    life. There is death. There is regeneration. There is movement.
    The famous phrase ``creative destruction'' defines the
    inevitable ebbing of economic power that was once constructive
    and now has passed its prime.
        One of the consequences of these subsidized interest rates
    is that organizations that perhaps ought not to be around are
    given new life. The financial markets on Wall Street are
    increasingly welcoming to the most marginal credits because
    there is a stampede for interest income. People are starving
    for it and Wall Street is providing for it.
        When nearly anyone can get a new loan--when nearly anyone
    can get a pass in the public market that means there are not
    enough bankruptcies. It is a problem, albeit a paradoxical one.
    We need new enterprise and we need the exit of unprofitable or
    over-the-sell-by date enterprise; so ultra-low interest rates
    perpetuate the status quo.
        Interest rates, as someone mentioned, are among other
    things, great sources of information. When interest rates are
    pressed to the floor, the credit markets provide less and less
    information. The information is there, but it is not to be
    intuited by prices.
        So, as to the other beneficiaries and losers, some of them
    are painfully obvious. The Fed talks more or less nonstop about
    inflation, but then I think is troubled by the lack of it. It
    wants to see more of it. Well, one department of American
    finance in which there is rampant inflation is the cost of
    obtaining a dollar of income. One might say the cost of
    retirement is in a terrific inflationary crisis.
        A friend of mine and of Lew's, a Wall Street figure of
    wonderful renown and of some mordant future, said a while ago,
    before he passed away, ``You know,'' he said, in all
    seriousness, ``you really can't get by today without $100
    million.''
        The point survives the exaggeration. You need more and more
    capital to maintain a decent income as a saver. That, to me, is
    not the least of the cost of these policies.
        Chairman Bernanke, in Jackson Hole, spoke to try to put our
    collective minds at ease about the unintended consequences of
    quantitative easing. And he said, ``I can enumerate four
    possible pitfalls''--four. There are 400,000 possible pitfalls.
        The Chairman, I think, is in error when he implicitly tells
    us that for every monetary cause A, there is a predictable
    monetary effect B. There are effect B, C, D, N, Z, and myriad
    effects that are so weird that no proper letter in the English
    language can describe them.
        What we are now embarked on is one of the great monetary
    experiments of all times and, Mr. Chairman, we are the lab
    rats.
        Chairman Paul. Mr. Lehrman?
        Mr. Lehrman. Mr. Chairman, you mentioned the period of
    1979, 1980--that period of high interest rates over which Mr.
    Volcker presided. I was there and I remember it, just as you
    do. One of the remarkable things about a review of the history
    of the Federal Reserve System from 1914 until the present is
    that the techniques that have been used either to suppress
    interest rates or the use of vaulting interest rates to bring
    about changes in economic activity has seen no reform.
        That is to say, Paul Volcker, you will remember in 1979,
    said his goal was to target the bank reserves; that is to say,
    to control the stock of money in circulation. This was another
    new experiment on interest rate manipulation, of course, with a
    noble intent.
        But this was just another form of interest rate
    manipulation which ultimately wound up putting the prime rate
    at 21 percent and market rates for a long-term Treasury at the
    highest level that they would been in American history,
    approximately 15 percent.
        It is forgotten in the dreamlike remembrance of that period
    that from 1979 to 1982 the American economy was in recession,
    the unemployment rate in New York State in 1982 in November--I
    remember that date very well for personal reason--was 11.2
    percent, higher even than the unemployment rate at the peak of
    the ``Great Recession,'' which we have undergone since 2008.
        It was not a halcyon period. President Reagan's first years
    of the Administration were almost impeached economically
    because of that.
        So as the French say, the more it changes, the more it is
    the same way; that is to say, Federal Reserve interest rate
    manipulation and management for one purpose or another.
        Who benefits and who suffers? In each period, under each of
    the Federal Reserve Chairmen who exercised this extraordinary
    power, it was different.
        Today, I want to point out only in response to the question
    the technique and its effect by which the Federal Reserve
    actually does operate in open market operations at the New York
    Federal Reserve System and has done so since the First World
    War.
        The Federal Reserve enters the market and purchases
    outright or on a match sale or on a repurchase agreement
    Treasury securities from the market against which they issue
    new money.
        That new money is made available only to the banks
    because--or the today 16 authorized dealers. So their
    portfolios are reduced and substituted with new money, which
    they then are in a position either to lend out to dealers and
    brokers or speculators or Wall Street investors who can post
    collateral, liquid collateral, by which they then can satisfy
    the lend that they can repay the loan.
        So the very first effect and the dominant effect, the
    generalized effect is commodity dealers and equity dealers who
    have first access to the money which is created anew by the
    purchase of Treasuries, which themselves cannot be repaid as
    they are refinanced with renewal bills.
        This is a prescription and has been in effect for a very
    long time, but especially since the end of the Second World War
    and even more dynamically since the end of Bretton Woods in
    1971, to enrich the investor class.
        I cannot incriminate them because to a certain extent I am
    a member of that class, but one does not have to be a rocket
    scientist to see that the Federal Reserve's process of
    monetizing the U.S. Treasury debt, providing new credit to the
    banking system to lend to their preferred clients divorces
    supply from demand, creating a monetary demand unassociated
    with the production of new goods and services.
        When total monetary demand exceeds supply, which is the
    prescription and the technique of the Federal Reserve,
    inflation must get under way.
        Now, that inflationary process today is hidden by the vast
    unemployed resources which we now have. And as a result, the
    new credit money immediately goes into the commodity and equity
    markets as well as into speculative vehicles like farmland, for
    example, which is the most exotic investment today of a sort of
    inside Wall Street investors.
        No change can occur in such a process without a full reform
    of the Federal Reserve System and a reform of the monetary
    system.
        Chairman Paul. Thank you very much.
        I now recognize Mr. Luetkemeyer for 5 minutes.
        Mr. Luetkemeyer. Thank you, Mr. Chairman.
        I appreciate your comments, Mr. Lehrman. They are
    interesting. You called farmland an ``exotic'' investment.
        I am looking to try and buy the farm next to mine, and I
    wouldn't think it would be an exotic investment. But I
    understand where you are coming from.
        I am just kind of curious, if the Fed would not purchase
    all of the government's debt, would there actually be a market
    out there, in your judgment, for our debt because of the size
    of the debt that we have, the amount of money that it would
    take to service that debt? Is there enough capital out there to
    service that debt? Is there enough capital out there to
    purchase that if we don't run the printing presses here at the
    debt and pick it up, in your judgment?
        Mr. Lehrman. May I first say, Congressman, that I am the
    owner of a 1,600-acre farm--corn, soybeans. And it is exotic
    from the standpoint of speculators who have never set foot in a
    cornfield, but certainly not from those--
        Mr. Luetkemeyer. That is who I am bidding against on the
    farm right now, are those guys.
        Mr. Lehrman. So then you understand what--
        Mr. Luetkemeyer. Yes, I do.
        Mr. Lehrman. --I was getting at.
        Mr. Luetkemeyer. But to me, it is not exotic. I would like
    to buy my neighboring farm, but to those folks, it brings the
    price up. I understand, but go ahead.
        Mr. Lehrman. So the question is: What would happen if, as
    the founders of the Federal Reserve System intended, the
    Congress of the United States and the budget of the Treasury
    were not able to finance its deficit by selling securities
    ultimately to the Federal Reserve System? Is the open market
    substantial enough to accommodate the vast sums presently
    required by the Treasury in order to finance its current
    spending?
        The answer to that is we would find that out, and it would
    be the ultimate discipline, which would require Congress on
    notice to the public that the financing of the Treasury was
    forcing interest rates higher and higher and excluding
    businesses and commercial firms from access to the credit
    markets because at the present level of deficits--let us call
    it all in about $1.5 trillion, including the credit financing
    bank--it would absorb almost all the net national savings
    available in the market, which gets right to the point of this
    hearing. What is the effect of the suppression of interest
    rates and their manipulation and the financing of 77 percent of
    the Federal Reserve's budget deficit in Fiscal Year 2011; what
    is the effect of that?
        It disguises from the public, the sovereign people, the
    effects of the fact that only 60 percent of the revenues which
    Congress decides to spend are financed through taxes, and 40
    percent of them through printed money either through the banks,
    the commercial banks, for foreign central banks.
        Mr. Luetkemeyer. I think there is another point to be made
    here too, which is the fact that because they are driving rates
    so low they are also disguising or hiding the fact--the
    exposure that we have when you go to $16 trillion worth of debt
    in just--an additional $4 trillion, $5 trillion, $6 trillion in
    the last 3 or 4 years--the amount of exposure we have to
    interest rate fluctuation. Right now, the cost of interest to
    our government is rather low compared to what it has been in
    the past because of driving interest rates down.
        If that would not happen the rates would go back--it would
    be very easy to double or triple the rates, because they are so
    low right now. Imagine what it would do to our budget if you
    doubled or tripled our cost of funds.
        Mr. Lehrman. We dealt with that issue at the last hearing,
    Congressman. We dealt with that issue. And were you to
    normalize the long-term interest rates--let us say for 30-year
    Treasury bonds--were you to normalize them consistent with the
    past history of the generation and given the scale of the
    direct debt of Treasury right now at $16 trillion, the total
    amount of the Federal budget devoted to interest payments could
    rise to as high as $800 billion, even towards a $1 trillion if
    the deficit were to continue.
        That puts, I think, a number on the effect.
        Mr. Luetkemeyer. Very good.
        Very quickly, how do we unwind this? What happens when we
    unwind this thing?
        Mr. Grant?
        Mr. Grant. We don't know. The Fed is--
        Mr. Luetkemeyer. We are still going to be a laboratory even
    for that.
        Mr. Grant. Yes. That, too, will be a learning-by-doing
    experience.
        Mr. Luetkemeyer. How painful will it be, do you think?
        Mr. Grant. Sorry?
        Mr. Luetkemeyer. How painful do you think it will be?
    Because--until interest rates rise, will inflation take place
    or will we go into a depression? Will it be runaway glory,
    everything going to be hunky-dory here? Or where are we going?
    If the Fed has to unwind this thing and get rid of the 2-point
    whatever--$8 trillion now--
        Mr. Grant. Congressman, we can rule out hunky-dory.
        As for the rest, we will see.
        Imagine a day in which the Treasury, to finance another
    $1.5 trillion deficit is raising, say, $15 billion in 2-year
    notes in the morning; and in the afternoon the Fed is holding a
    special auction to liquidate the remaining excess portion of
    those balance sheets. So they will be one auction on top of
    another.
        We simply don't know the outcome, but we do know, I think,
    that the Fed's assurances must be discounted. The Fed is
    remarkably complacent with regard to its capacity to form
    financial judgments. This is the outfit that panicked in front
    of the prices of computer clocks in 1999--neglected to see or
    to take due measure of the speculative mania in technology
    stocks that ended in the early aughts. And that positively saw
    not one aspect of the greatest credit crisis in three
    generations looming before it in the mid-2000s.
        And we are meant to believe that the perspicacity of the
    judgment of the Fed will now help them anticipate the end of
    the necessity for this Q.E. and to unburden themselves of the
    excess security.
        So I don't doubt that they mean to have the techniques to
    affect the exit. What I do doubt--and I think there is evidence
    in support of doubt--is that they have the judgment to mark the
    time and the need.
        Mr. Lehrman. May I say a word on that question, Mr.
    Chairman?
        Every Thursday, at about 4 p.m., the Federal Reserve System
    publishes its balance sheet. That balance sheet as of Thursday
    night, last night--I looked at it--shows that to do it in round
    numbers, the Fed owns approximately $3 trillion of securities,
    primarily Treasury securities and mortgage securities,
    mortgage-backed securities and agency bonds.
        If you look further into the detail and the footnotes you
    will observe that the largest fraction of the balance sheet of
    the Federal Reserve System is in long-term securities.
        The historic practices of central banks during long periods
    of stable prices was only to own short-term securities so that
    were inflation to arise, they could, to use your phrase, unwind
    their portfolios selling securities, or letting them run off
    into the market in order to reduce the quantity of money and
    credit in circulation and stabilize the price level.
        The Federal Reserve is now faced not only with the daunting
    task of unwinding the enormous monetization of Treasury and
    mortgage-backed securities, but they have encumbered the
    balance sheet with long-term securities which will not run off
    on a regular basis the way short-term commercial bills do with
    90-day maturities.
        They have the largest fraction of--far and away the
    dominant fraction in 10-to-30-year securities. So the only way
    they can get rid of them is to sell them into the open market.
        If the economy is running full-tilt at full employment, and
    let us say the employment rate might be at 5 percent, it could
    have nothing less than, as you implied, a very dynamic effect
    on interest rates in general, not just in the United States,
    but worldwide in as much as the United States dollar is the
    world reserve currency.
        Mr. Luetkemeyer. Thank you.
        I yield back. Thank you, Mr. Chairman.
        Chairman Paul. Thank you.
        We are going to a second round now of questioning.
        The first question I have I would like to get sort of a
    short answer for, because I have another question that follows
    and we will be voting on the Floor pretty soon. But what is
    your concept of the current situation now and whether or not we
    have a bubble? Most of us recognize a NASDAQ bubble. Others
    recognize the housing bubble. Do you see a bubble right now
    that could suddenly change and change the markets and all
    perceptions?
        Mr. Grant?
        Mr. Grant. Yes, Mr. Chairman, I do. I see a bubble in
    Treasury securities. I see a bubble in sovereign debts
    worldwide. The world has come to believe that the promises to
    pay of sovereign governments are intrinsically safe--not
    everyone--but Northern European governments are meant to be
    intrinsically safe. Australia, I think there are seven or eight
    AAA-rated governments left on the face of the Earth. People are
    crowding into the claims of these governments, not least into
    our own.
        These are interest rates that have not been seen in modern
    times in Northern Europe. There are plenty of governments
    borrowing at negative interest rates. And as was the case in
    every single market bubble in history, there are wonderfully
    persuasive stories circulated to rationalize what on the face
    of it is an abuse of common sense.
        So I nominate bonds themselves as our looming bubble.
        Chairman Paul. Mr. Lehrman, any additional comments?
        Mr. Lehrman. The number of bubbles--even with vast
    unemployed resources in nations around the world, not just in
    the United States--is legion. And Jim has just mentioned some,
    but the Congressman and I were talking about farmland.
        The value of farmland, as one vehicle for speculation, not
    only among well-positioned farmers, but I mean to say the
    investor class, the price of farmland, high-quality, let us say
    160-bushel-per-acre, non-irrigated farmland from Central
    Pennsylvania all the way to the foothills of the Rockies, that
    is to say the great corn belt, has doubled just in the past 4
    years.
        This has never been experienced at quite this rate of
    change; or I should say this bubble has never occurred on this
    scale in the past. It is one more example.
        Chairman Paul. My follow-up question is to you, Mr.
    Lehrman. I would like Mr. Grant to comment as well. You talked
    about a long-term solution, more about the monetary reform and
    the use of gold. I want to concentrate more on that shorter-
    range solution or something you suggest that could help. And
    that is to look to the original Federal Reserve Act and not to
    allow the Fed to buy Treasury bills, but to allow the Fed to be
    the lender of last resort to sound commercial loans.
        Did I state that correctly?
        Mr. Lehrman. Exactly.
        Chairman Paul. Okay. If the Fed buys a commercial loan,
    they could buy this with money creation. Would this be
    expanding the money supply? Would this be monetizing a debt?
    And could it lead to a problem as well? Or would you argue that
    this is not monetary inflation?
        Mr. Lehrman. I would argue it would not be monetary
    inflation. The difference is profound. The purchase of
    commercial bills for the purpose of production by the Federal
    Reserve or by commercial banks against the issue of new money
    goes to solvent firms who, in the process of production, then
    sell their output and they repay the loans.
        And as a result, the new credit which has been advanced
    against the commercial bill or against the productive loan
    expands the money supply during that particular market
    interval. But 90 days later or 120 days later, the goods that
    were produced as a result of that financing realize their value
    and then those loans are liquidated, restoring equilibrium to
    the money market.
        Chairman Paul. So do you separate this from being the
    lender of last resort? Or would you put it in that category?
        Mr. Lehrman. I use the phrase ``lender of last resort''
    because that is, of course, the rationalization that everybody
    uses to give the Fed the privileges to create money without
    limit. As the lender of last resort, the Fed would have the
    possibilities of buying solvent commercial loans in the open
    market, which themselves would be liquidated in a windup
    naturally in the course of economic activity.
        Whereas, in the case of the Treasury, the Treasury is never
    able, under present circumstances, and has not been since
    pretty much the end of the Second World War, to liquidate the
    bills or the bonds which they are selling. And it leads to a
    permanent expansion of the money supply never to be unwound by
    the natural course of production.
        Chairman Paul. Would doing this interfere with interest
    rates?
        Mr. Lehrman. In the case of commercial bills or productive
    loans, which the Fed would then discount when they were offered
    by the commercial banks against the desire for new credit, this
    would, in the same sense, lead to a rise in interest rates when
    credit demands were higher, and a fall in interest rates when
    the commercial loans were being repaid to the commercial banks,
    and the commercial banks repaying the central bank for the
    loans that they obtained against commercial lending collateral.
        Chairman Paul. Okay. And our voting has started, but I
    would like to get Mr. Grant to make a comment on that, if he
    could.
        Mr. Grant. I would vote. I am with Lew.
        Chairman Paul. Pardon me?
        Mr. Grant. I said I would go vote; I am with Lew on this. I
    can't add to this or shouldn't take your time in adding to it.
        Chairman Paul. Okay. Mr. Huizenga from Michigan, would you
    like to ask some questions?
        Mr. Huizenga. I would. Also, Mr. Chairman, I want to say
    thank you for your service to our country and your time here in
    Congress, as well as your service to the philosophy, the battle
    that we have going on.
        And the question I have is, I am curious if we can touch on
    the dual mandate of the Fed and what you believe that may have
    done to get us in the current situation. And would you suggest
    us changing that dual mandate of having them pursue low
    inflation and high employment? And any time I have, I would
    like to give back to the Chair if he so desires to do a follow
    up.
        Mr. Grant. Congressman, I think that one might, again, go
    back to the founding precepts of the Fed. The Fed got into
    business, if you read the opening paragraphs of the Federal
    Reserve Act, the Fed was to create a market in commercial bills
    and to exchange paper for gold in such a way as to support the
    working of the gold standard.
        And the phrase added was, ``and for other purposes''--
    pregnantly, it was added. But I would keep the mandate even
    simpler than one. I would say that the Fed ought to be in
    business to support an objective definition of the value of the
    dollar.
        In this day and age, we could not have anything resembling
    industrial commerce as we know it without the most precise
    specifications of material weights and measures. And somehow,
    we have neglected this in money.
        Money is what someone thinks it should be in some
    particular public institution like a central bank or a Treasury
    Department. The lead article of the Financial Times this
    morning was a plaint by the finance minister of Brazil against
    quantitative easing on the grounds that the willful
    depreciation of the dollar--or I might say the willful
    redefinition of the dollar--would certainly lead to the
    interruption of trade and to frictions that did not exist
    previously.
        The gentleman to my left has written a fabulous book on
    this, and I think it is his view as well that what is wanted is
    the restoration of objective value in the dollar. And if the
    Fed could do that and maintain it, it seems to me that good
    things would follow.
        As it is, we have arrived at the most peculiar point in
    which people have come to think that if the Fed can raise up
    the value of stocks, bonds, farmland and commodities, somehow
    prosperity will follow. It seems to me that is a very peculiar
    horse in front of a very odd cart.
        Mr. Huizenga. I appreciate that.
        And Mr. Chairman, I am happy to yield my time to you.
        Chairman Paul. I thank you.
        I will recognize Mr. Luetkemeyer.
        Mr. Luetkemeyer. Thank you, Mr. Chairman.
        Just very quickly, I only have a couple of questions.
        Mr. Grant, what do you believe would be the ideal interest
    rate or the ideal range that the Fed should shoot for, that our
    rates should be for, say, our T-bills or Fed funds rates or
    home loans or somewhere in there? Use some of those figures.
        Mr. Grant. Sir, I think the Fed should not be shooting at
    those rates. I think that they should be determined in the
    marketplace. If you look back on history, kind of a normal
    mortgage rate was 4.5 to 5 percent; T-bill rate, maybe 3 to 4
    percent; long-dated securities, yielding perhaps 6, 7 percent
    depending on the credit; and higher with regard to junk or
    speculative grade credits.
        But I would let the wonderfully invisible forces of the
    marketplace into this line of work and let them do their
    thing--
        Mr. Luetkemeyer. Okay, if that is the case then, do you get
    rid of the Fed, or do you think there is a place for it?
        Mr. Grant. Sir?
        Mr. Luetkemeyer. Would you get rid of the Fed then or do
    you believe there is a place for it?
        Mr. Grant. I believe that the Fed ought to be doing much
    less than what it is doing, and it could do with many fewer
    economists. They could be doing with a much narrower mission
    statement and as long as we are talking about reforming this
    outfit, we should not fail to institute the Fed's first office
    of unintended consequences.
        Mr. Luetkemeyer. Mr. Lehrman, would you like to comment on
    that?
        Do you believe we need to have a Fed or do you believe--
        Mr. Lehrman. I have made the case in my book and in
    previous books that if we are going to have a Federal Reserve
    system--for it should be said it is not an indispensable
    necessity--but if we are going to have a mere agency of the
    Congress maybe with the stature, so to speak, of the Interstate
    Commerce Commission or the Federal Communication Commission,
    then it must be circumscribed by very careful rules, whereby it
    conducts its policy such that it is consistent with the
    activities of a free market and a free people.
        So, that yes, I can embrace the Federal Reserve Act of
    1913, and the very few moments in which it conducted itself
    according to Article I of the Constitution, Sections 8 and 10,
    namely, to define the value of the dollar, regulate the--
        Mr. Luetkemeyer. So you could live with it as long as it
    went back to its original intentions and functions?
        Mr. Lehrman. I think we can go forward. We can't go
    backward, but I think we can go forward to a restoration of a
    Federal Reserve System which operates with some restraints
    imposed by Congress, the definition of the collateral, which is
    eligible at the Federal Reserve for discount against new money
    to encourage economic growth as opposed to encourage Treasury
    budget deficit.
        Mr. Luetkemeyer. Thank you.
        Mr. Chairman, I yield back.
        Chairman Paul. Thank you.
        I wanted to thank our Members who are here today, and our
    witnesses. And I appreciate very much you being here.
        The Chair notes that some Members may have additional
    questions for this panel, 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 hearing is now adjourned.
        [Whereupon, at 10:36 a.m., the hearing was adjourned.]

                                A P P E N D I X

                               September 21, 2012

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