[Congressional Record Volume 158, Number 111 (Tuesday, July 24, 2012)]
[House]
[Pages H5150-H5162]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
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FEDERAL RESERVE TRANSPARENCY ACT OF 2012
Mr. ISSA. Mr. Speaker, I move to suspend the rules and pass the bill
(H.R. 459) to require a full audit of the Board of Governors of the
Federal Reserve System and the Federal reserve banks by the Comptroller
General of the United States before the end of 2012, and for other
purposes, as amended.
The Clerk read the title of the bill.
The text of the bill is as follows:
H.R. 459
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Federal Reserve Transparency
Act of 2012''.
SEC. 2. AUDIT REFORM AND TRANSPARENCY FOR THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM.
(a) In General.--Notwithstanding section 714 of title 31,
United States Code, or any other provision of law, an audit
of the Board of Governors of the Federal Reserve System and
the Federal reserve banks under subsection (b) of such
section 714 shall be completed within 12 months of the date
of enactment of this Act.
(b) Report.--
(1) In general.--A report on the audit required under
subsection (a) shall be submitted by the Comptroller General
to the Congress before the end of the 90-day period beginning
on the date on which such audit is completed and made
available to the Speaker of the House, the majority and
minority leaders of the House of Representatives, the
majority and minority leaders of the Senate, the Chairman and
Ranking Member of the committee and each subcommittee of
jurisdiction in the House of Representatives and the Senate,
and any other Member of Congress who requests it.
(2) Contents.--The report under paragraph (1) shall include
a detailed description of the findings and conclusion of the
Comptroller General with respect to the audit that is the
subject of the report, together with such recommendations for
legislative or administrative action as the Comptroller
General may determine to be appropriate.
(c) Repeal of Certain Limitations.--Subsection (b) of
section 714 of title 31, United States Code, is amended by
striking all after ``in writing.''.
(d) Technical and Conforming Amendment.--Section 714 of
title 31, United States Code, is amended by striking
subsection (f).
SEC. 3. AUDIT OF LOAN FILE REVIEWS REQUIRED BY ENFORCEMENT
ACTIONS.
(a) In General.--The Comptroller General of the United
States shall conduct an audit of the review of loan files of
homeowners in foreclosure in 2009 or 2010, required as part
of the enforcement actions taken by the Board of Governors of
the Federal Reserve System against supervised financial
institutions.
(b) Content of Audit.--The audit carried out pursuant to
subsection (a) shall consider, at a minimum--
(1) the guidance given by the Board of Governors of the
Federal Reserve System to independent consultants retained by
the supervised financial institutions regarding the
procedures to be followed in conducting the file reviews;
(2) the factors considered by independent consultants when
evaluating loan files;
(3) the results obtained by the independent consultants
pursuant to those reviews;
(4) the determinations made by the independent consultants
regarding the nature and extent of financial injury sustained
by each homeowner as well as the level and type of
remediation offered to each homeowner; and
(5) the specific measures taken by the independent
consultants to verify, confirm, or rebut the assertions and
representations made by supervised financial institutions
regarding the contents of loan files and the extent of
financial injury to homeowners.
(c) Report.--Not later than the end of the 6-month period
beginning on the date of the enactment of this Act, the
Comptroller General shall issue a report to the Congress
containing all findings and determinations made in carrying
out the audit required under subsection (a).
The SPEAKER pro tempore. Pursuant to the rule, the gentleman from
California (Mr. Issa) and the gentleman from Maryland (Mr. Cummings)
each will control 20 minutes.
The Chair recognizes the gentleman from California.
General Leave
Mr. ISSA. Mr. Speaker, I ask unanimous consent that all Members may
have 5 legislative days within which to revise and extend their remarks
and include extraneous materials on the bill under consideration.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from California?
There was no objection.
Mr. ISSA. I yield myself such time as I may consume.
H.R. 459, the Federal Reserve Transparency Act, directs the GAO to
conduct a full audit of the Federal Reserve. The Dodd-Frank legislation
mandated a GAO audit of the Fed, but that audit, issued by the
Government Accountability Office in July of 2011, focused solely on the
issues concerning emergency credit facilities.
GAO remains restricted, under the current law, from conducting a
broader audit of the Fed that includes, for instance, a review of the
Fed's monetary policy operations and its agreements with foreign
governments and central banks. The bill remedies this situation by
permitting GAO, the investigative arm of Congress, to conduct a
nonpartisan audit that will review all of these transactions. The
findings of the audit are to be reported to Congress.
It is particularly appropriate that we consider this legislation at
this time. While Congress should not manage or micromanage details of
monetary policy, it needs to be able to conduct oversight of the Fed.
The Fed was created by Congress to be a central bank, independent of
the influence of the U.S. Treasury. It was never intended to, in fact,
be independent of Congress or independent of the American people.
In recent years, the Fed's extraordinary interventions into the
economy and financial markets have led some to call into question its
independence. We do not ask for an audit for that reason. We ask for an
audit because the American people ultimately must be able to hold the
Fed accountable; and to do so, they must know, at least in retrospect,
what the Fed has done over these many years that it has been without an
audit. That is why I support H.R. 459, a bipartisan bill with 273 other
cosponsors.
I urge my colleagues' support, and I reserve the balance of my time.
Announcement by the Speaker Pro Tempore
The SPEAKER pro tempore. Members are reminded not to traffic the well
while another Member is under recognition.
Mr. CUMMINGS. Mr. Speaker, I yield 2 minutes to the gentleman from
Maryland (Mr. Hoyer).
Mr. HOYER. I thank the gentleman for yielding.
Mr. Speaker, when the sponsors of this bill talk about ``auditing''
the Federal Reserve, they don't mean a traditional audit. An outside,
independent accounting firm already audits the Federal Reserve's annual
financial statements, and GAO is already empowered to review the Fed's
financial
[[Page H5151]]
statements and a broad range of its functions.
In fact, the Wall Street reform legislation Democrats passed last
Congress expanded the types of audits GAO can conduct, as has been
mentioned by Mr. Issa. So there is transparency and accountability when
it comes to the Federal Reserve's finances and operations. However,
this bill would, instead, jeopardize the Fed's independence by
subjecting its decisions on interest rates and monetary policy to a GAO
audit.
The Fed, like every other major central bank in the world, is
independent, and Congress has rightly insulated the Fed from short-term
political pressures.
I agree with Chairman Bernanke that congressional review of the Fed's
monetary policy decisions would be a ``nightmare scenario,'' especially
judging by the track record of this Congress when it comes to governing
effectively and intervening in the courts and other areas. We don't
have to look any further than the Congress unnecessarily taking the
country to the brink of default last summer in a display of politics.
All of us, Mr. Speaker, want transparency. All of us here want to
make sure that the Federal Reserve is working to carry out the economic
goals of the American people, which are maximum employment and price
stability. But that's not what this bill is about. This bill increases
the likelihood that the Fed will make decisions based on political
rather than economic considerations, and that is not a recipe for sound
monetary policy.
I urge my colleagues to defeat this bill and preserve the
independence of the Fed so it can keep our currency stable and
cultivate the best conditions for our economy to grow and create jobs.
Unfortunately, Mr. Speaker, we, in Congress, have shown too
frequently our inability in a political environment to make tough
choices. That failure has led us, in part, to where we are today. I
urge my colleagues to defeat this unwarranted, unjustified, and
dangerous legislation.
Mr. ISSA. Mr. Speaker, it's now my honor to yield 2 minutes to the
gentleman from Texas (Mr. Paul), the author of this bill and the man
who understands that not knowing should never be an answer.
Mr. PAUL. I thank the gentleman for yielding.
I rise, obviously, in strong support of this legislation. I don't
know how anybody could be against transparency.
They want secrecy, especially when the secrecy is to protect
individuals who deal in trillions of dollars, much bigger than what the
Congress does. And these trillions of dollars bail out all the wealthy,
rich people; the banks and the big corporations; international,
overseas banks; bailing out Europe; dealing with central banks around
Europe and different places.
And to say that we should have secrecy and to say that it's political
to have transparency, well, it's very political when you have a Federal
Reserve that can bail out one company and not another company. That's
pretty political.
I think when people talk about independence and having this privacy
of the central bank means they want secrecy, and secrecy is not good.
We should have privacy for the individual, but we should have openness
of government all the time, and we've drifted a long way from that.
The bill essentially removes the prohibitions against a full audit.
To audit, we should know what kind of transactions there are. We should
know about the deals that they made when they were fixing the price of
LIBOR. These are the kinds of things that have gone on for years that
we have no access to.
Congress has this responsibility. We are reneging on our
responsibility. We have had the responsibility and we have not done it,
so it is up to us to reassert ourselves.
The Constitution is very clear who has the responsibility, but the
law conflicts with the Constitution. The law comes along and says the
Congress can't do it. Well, you can't change the Constitution and
prohibit the Congress from finding out what's going on by writing a
law, and this is what has happened.
So it is time that we repeal this prohibition against a full audit of
the Federal Reserve. We deserve it. The American people deserve it. The
American people know about it and understand it, and that's what
they're asking for. They're sick and tired of what happened in the
bailout, where the wealthy got bailed out and the poor lost their jobs
and they lost their homes.
Mr. CUMMINGS. I yield 4 minutes to the distinguished gentleman from
Massachusetts (Mr. Frank), the ranking member of the Financial Services
Committee.
Mr. FRANK of Massachusetts. Mr. Speaker, I think this is a bad idea,
and I am somewhat confused.
By the way, we will be debating tomorrow a bill which restricts
rulemaking, and it exempts the Federal Reserve, as I read it. So we're
kind of on again/off again about the Federal Reserve. It seems to me
what we're talking about is taking some fake punches at the Federal
Reserve but not doing anything serious.
My Republican colleagues brought up a reconciliation bill that was
going to subject the Consumer Bureau to appropriations.
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So I offered an amendment to subject the Federal Reserve to
appropriations. That was voted down. So we're not going to restrict
their rulemaking. We're not going to subject them to appropriations,
even though that's being done elsewhere. We're going to audit them,
which is a way to look tough without really being tough.
Mr. ISSA. Will the gentleman yield?
Mr. FRANK of Massachusetts. I yield to the gentleman from California.
Mr. ISSA. I thank the gentleman. Would you suggest that we should do
both of those?
Mr. FRANK of Massachusetts. No. I reclaim my time and say we should
do none of them. I was saying I have a consistent position. I don't
think we should do any of them. What I'm saying is, people who get up
there and beat their chest about how tough they are and they're not
afraid of the Federal Reserve but exempt it from the great rulemaking
bill, and subject the Consumer Bureau--that terrible threat to the
well-being of Americans--to the appropriations process, but let the
Federal Reserve, which spends about 150 times as much, go free--I am
inclined to doubt their seriousness. Not their purity, that would be a
violation of the rules, but their seriousness. This is a way to shake
your fist at that big, bad Fed. And it's not a good way.
We hear a lot about uncertainty. Remember, the Federal Reserve is now
subject to a complete openness about all of its transactions with
private companies. We did that last year. The gentleman from Texas had
a major role in that. When the Federal Reserve deals with any other
institution, we know what it does. We don't know it necessarily the
same day. There were these predictions about what terrible things were
going to happen when the Federal Reserve did this and that. They
haven't come true. Maybe they will some day, but we will know it.
This makes this exception: it says that we will audit the decisions
about monetary policy. It says that members who vote on what the
interest rate should be will now be audited. They will be subject to
being quizzed about why they did that. Now, I will tell my Democratic
friends, understand that one part of this problem is the objection on
the part of the Republican Party to the fact that our Federal Reserve,
unusual among central banks, has a dual mandate. They are charged under
our statute to be concerned about inflation and about unemployment.
Now, the Republicans have an agenda they're keeping on low key until
next year. They have a bill, but they won't act on it yet. But they
would like to strip that part of the mandate. They would like the
Federal Reserve to be only involved in inflation. They don't like the
notion that the Federal Reserve deals with unemployment, and this is a
way that, if it were ever to become law, and no one thinks it will--
this is a, Look how tough we are. We are going to wave our fists at the
Fed. But it would be a way to kind of put pressure on members of the
Open Market Committee and see, were you worried about unemployment when
you did this? That's the audit. This has nothing to do with how they
spend their money. It has nothing to do with whom they contract. That
is what people usually think about an audit. It doesn't
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have anything to do with whether they are efficient or not. It is an
ideological agenda by a group of people who didn't like what the
Federal Reserve was doing--under, by the way, George Bush, there was
reference to the bailouts, which were, of course, under the Bush
administration. One of the things that we did, by the way, in our bill
2 years ago--and all my Republican colleagues voted against the bill--
was to take away from the Federal Reserve the power they used--under
President Bush--to give/lend $85 billion to AIG. We rescinded that. I
don't think Mr. Bernanke, a Bush appointee, was doing the wrong thing
necessarily, but we took back that power.
So this is partly a show because on the two serious efforts to
curtail the Fed's powers, my Republican colleagues aren't there. But
secondly--and as I said, I'm consistent--I don't think that we should
do any of these things. I think what we did with regard to openness
makes sense. I'm not pretending to be tough when I'm not.
The SPEAKER pro tempore. The time of the gentleman has expired.
Mr. CUMMINGS. I yield the gentleman 1 additional minute.
Mr. FRANK of Massachusetts. But what it will do is destabilize. We
have worries about expectations. There is a fear that we will be too
inflationary or that we won't grow enough. People on Wall Street are
not as sophisticated as some people think. I don't mean they're not
sophisticated about their own business, as we know, but they will read
this and take it more seriously than the Members here do who think it
might eventually become law, and it will destabilize some of the
financial system. They will see it as political interference not with
the contracting procedures, not with the budget, not with how many cars
they have, but with how they decide on interest rates. And the
perception that the Congress is going to politicize the way in which
interest rates are set will in itself have a destabilizing effect.
And as I said, nobody here thinks this will ever become law. But
there is this fear on the part of others who don't know that that will
translate into precisely the kind of uncertainty, precisely the kind of
unsettling on investments that my Republican colleagues pretend to
fear, and it will also send them the message, stop worrying about
unemployment.
Mr. ISSA. As I introduced my good friend and leader on this issue,
Mr. Chaffetz, I might note that when the word ``Democrat'' and
``Republican'' are used in this Hall, hopefully when there are 45
Democratic Members on this bill as cosponsors, we would recognize this
is a bipartisan bill.
I now yield 2 minutes to the gentleman from Utah (Mr. Chaffetz).
Mr. CHAFFETZ. I thank the chairman.
I also want to appreciate and congratulate Dr. Ron Paul for his
tireless pursuit of this openness and transparency. Without his
leadership, we wouldn't be at this point today, and I applaud him and
thank him for that.
Some would say that the Fed is already audited, but there are some
key points where it is not. These include transactions with foreign
central banks, discussion and actions on monetary policy, and
transactions made under the direction of the Federal Open Market
Committee.
If we are truly about openness and transparency in this Nation, which
distinguishes us above and beyond so many others, we deserve and need
to know this information.
We need also understand the imperative that is before us because the
Federal Reserve balance sheet has exploded in recent years. In fact,
since 2008, it has literally tripled. It's gone from $908 billion on
its balance sheet to over $2.8 trillion, nearly a 33 percent annualized
increase since January 2008.
The Federal Reserve ownership of Treasuries has also increased
substantially in recent years, having more than doubled from January of
2008 to January of 2012, where it went from $741 billion to $1.66
trillion.
Let's understand also that in fiscal year 2011, the Federal Reserve
purchased 76 percent of new Treasuries. Certainly the American people
and this Congress deserves more openness, transparency, and at the very
least an audit. I encourage my colleagues on both sides of the aisle to
support this commonsense piece of legislation, and again congratulate
Dr. Paul, and continue to hope for his pursuit of this issue.
Mr. CUMMINGS. I yield 2 minutes to the gentlewoman from New York
(Mrs. Maloney).
Mrs. MALONEY. This is an absolute terrible idea. Although I am in
total agreement with Mr. Paul that transparency is a virtue, I also
believe that the Federal Reserve must be free of any political
influence, and I'm afraid this bill opens the door for precisely that
to happen. I don't believe there is anyone in this Chamber that thinks
that what the process needs is more politics.
Make no mistake, I agree that maximum transparency is necessary and
desirable, and that's precisely why we included numerous transparency
requirements in the financial reform bill, as well as numerous audit
requirements. We authorized the GAO to audit the Fed's emergency
lending facility. We authorized the GAO to audit any special facility
created within the Fed. And we required the Fed to issue an assessment
2 years after institutions were granted access to the Fed's discount
window.
We crafted those measures and more in a way that ensures transparency
but still preserves the independence of the Federal Reserve in its
decision-making process in the critical area of monetary policy. But
this bill, as it now stands, would provide information without a proper
context. That could have unintended consequences and have totally
unwarranted effects on consumer confidence in our financial
institutions.
If the individual members of the Open Markets Committee know that
each one of their decisions are subject to potential political
pressure, it would significantly alter that decision-making process. An
open door to the Federal Open Markets Committee would invite political
pressures. And having decisions that are driven by politics and polling
data is not the path to sound monetary policy.
Decisions about monetary policy should never be based on the raw
political needs of the moment but instead should always be based
strictly on objective economic considerations and guided by the twin
mandates of low inflation and full employment. The unintended
consequences of this bill would be to open the Federal Reserve to
political influence, and that would have a negative impact on the Fed's
independence and its ability to produce sound economic policy. I urge a
strong bipartisan ``no'' vote.
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Mr. ISSA. It is now my honor to yield 1 minute to the gentleman from
Texas (Mr. Farenthold).
Mr. FARENTHOLD. Mr. Speaker, the Constitution grants us the power to
coin money and regulate the value thereof, and we've delegated this to
the Fed. Unfortunately, we've tied our hands behind our back with
respect to seeing what they're doing, and it's our duty to conduct
oversight. A moment ago, Mr. Frank said the audit was just fist
pounding and chest pounding. I disagree. It's the first step. It is our
doing our homework to determine what needs to be done to reform the
Fed.
Chairman Bernanke said this bill would be a ``nightmare scenario'' of
political meddling in monetary affairs. I disagree. I think the current
situation is a nightmare scenario in unaccountable government. As
Justice Brandeis said, ``Sunshine is always the best disinfectant.'' As
a member of the Oversight and Government Reform Committee, we demand
transparency from agencies like the GSA, the TSA, and other Fed
agencies.
I join my friend and neighbor in Congress, Dr. Paul, in demanding for
the American people that sunshine be shined into the Fed and this audit
be conducted. I urge my colleagues to support this bill because the
American people have a right to know.
Mr. CUMMINGS. I yield 1 minute to the gentleman from Massachusetts
(Mr. Frank).
Mr. FRANK of Massachusetts. Mr. Speaker, to illustrate the
misconceptions about this bill, let's refer to what the gentleman from
Utah (Mr. Chaffetz) had to say. He said 76 percent of the purchasers of
this and that. Well, if they were so nontransparent, I don't know how
he would know that. He didn't have a subpoena. But the fact is, yes, he
knows that because of the
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transparency we've already built in. But all the more important, the
details, the specifics of every one of those transactions are already
public.
This isn't about those transactions or about with whom they were done
and under what time period. It's about the motives of the people
setting monetary policy.
And let me address the Constitution. Yes, it is true that the
Constitution gives us the power to do this. The Constitution gives us a
lot of power. It gives us power to declare war on Canada. It gives us
the power to do a lot of things. Wise people pick and choose which
powers they use.
But this is not about getting more information about their
transactions. All of that is out there. This is an effort to give
politicians, a wonderful group of people of which I am one, more direct
involvement in the actual decisions on setting of interest rates than
is good for the economy.
Mr. ISSA. It is now my honor to yield 1 minute to the gentleman from
Michigan (Mr. Amash).
Mr. AMASH. I would like to thank Chairman Issa and thank and
congratulate Dr. Ron Paul for his tireless work on this issue for many
decades.
Mr. Speaker, what is the Federal Reserve? I think even many Members
of this body couldn't answer that question. And yet Congress has
delegated its constitutional authority to this committee of bankers and
Presidential appointees. To no institution in our country's history has
Congress given so much power while knowing so little.
As our central bank, we've entrusted the Federal Reserve with
managing inflation. That means the Fed can change the value of
Americans' life savings, their retirement accounts and their mortgages.
Lately, the Fed has taken on the role of ``lender of last resort.'' It
has made unprecedented market interventions, promising billions of
dollars to the country's largest financial institutions. When investors
wouldn't buy mortgages, the Fed did. When creditors became wary of
Congress' spending binge, the Feds stepped in.
Years ago, Congress enacted an audit statute, but it prevents an
audit of monetary policy. The government's accountants understandably
were outraged, saying they couldn't ``satisfactorily audit the Federal
Reserve system without authority to examine the Fed's largest assets.''
Congress should be wary of all types of central planning. We should
be especially vigilant against unaccountable groups that profoundly
affect Americans' lives and liberty.
Pass this bill, and let's audit the Fed.
Mr. CUMMINGS. Mr. Speaker, I yield 2 minutes to the gentleman from
North Carolina (Mr. Watt).
Mr. WATT. I thank the gentleman.
Let me say, first, that this bill is not about sunshine and it's not
about transparency. It is about dissatisfaction that some individuals
have with the mandate that Congress has given to the Federal Reserve.
The gentleman who just spoke is absolutely right; They are supposed
to deal with inflation. That's what we told them to do in their
mandate. They're supposed to deal with unemployment. That's what we
told them to do in the mandate we gave.
And some people over there are dissatisfied with the fact that--they
don't want them to deal with unemployment. They don't want them to try
to adjust and make changes that will be beneficial to our economy. And
if they don't want that, they ought to just introduce a bill that
repeals the mandate that we gave to them.
Don't come and say that we are talking about sunshine and
transparency.
Every time I turn on the television now, I hear the Federal Reserve,
Chairman Bernanke and members of the Federal Reserve, talking about how
the economy is going. That is not lack of sunshine and lack of
information. I thought we had dealt with this when Mr. Paul was the
ranking member of the subcommittee and I was the chairman.
Mr. Paul's problem is he doesn't like the Federal Reserve. He is
avowedly in favor of doing away with the Federal Reserve. That's an
honest position. But don't come in and try to cloak it in the guise of
this agency is not transparent or it lacks sunshine. If you don't like
the mandate that they have, then have the guts to stand up and
introduce a bill that says that we are doing away with the Federal
Reserve.
The SPEAKER pro tempore. The time of the gentleman has expired.
Mr. CUMMINGS. I yield the gentleman 1 additional minute.
Mr. WATT. If you think we are in trouble now, if you get the politics
and the Congress involved in transactions with foreign governments and
the decisions about how we get ourselves out of this unemployment
situation, if we have some answers about how to get out of
unemployment, then I would assume we would come forward with them. And
nobody on this floor of this Congress has done anything to take up an
unemployment bill. So I'm glad we have the Federal Reserve over there
at least trying to figure out how to make some adjustments in our
economy that will deal with unemployment.
The last thing I want is for this Congress to be second-guessing--or
an auditor that is not elected by anybody to be second-guessing--the
decisions of the people who are on the Federal Reserve. An auditor
might be a good accountant, he can count, but I want somebody on the
Federal Reserve, and hopefully it would be nice to have some people in
Congress who can make some decisions about how to deal with
unemployment.
Mr. ISSA. Mr. Speaker, the rules of the House prohibit going after
someone's motivation. I'm very concerned that a bill that, in a
substantially similar form, was placed into Dodd-Frank by then-Chairman
Barney Frank is now being characterized as somehow ill-intended and
mischievous activity by the proponent. I would trust that that is not
the intent of the speakers on behalf of that side of the aisle about
this bipartisan bill. It is virtually identical to the language that
Barney Frank put into Dodd-Frank.
Mr. WATT. Will the gentleman yield?
Mr. ISSA. I yield to the gentleman from North Carolina.
Mr. WATT. I just want to be clear that Mr. Frank and I both voted
against the bill that you're talking about, so don't try to make it
sound like it's Mr. Frank's and my bill. We voted against the bill.
This is Ron Paul's bill. We thought it was a terrible idea then, and we
think it's a terrible idea now.
Mr. ISSA. Reclaiming my time, I would like to yield 15 seconds to the
gentleman from Texas, the author of the bill.
Mr. PAUL. Did you vote against Dodd-Frank? Because it was in Dodd-
Frank. It wasn't a separate bill. Maybe on a separate vote you might
have done it, but it was in Dodd-Frank.
Mr. ISSA. I now yield 1 minute to the gentleman from Montana (Mr.
Rehberg).
Mr. REHBERG. Thank you, Mr. Issa, and I especially thank you, Dr.
Paul.
Tomorrow, the House of Representatives will uphold our constitutional
duty and vote to pull back the secretive curtain of the Federal
Reserve. The American people have a right to know. It's an important
step in openness and government transparency that's long overdue.
Just a few years ago, the Senate rejected an effort to add this
strong audit language to the Dodd-Frank bill, but times are changing.
As our economy struggles and job creation lags, it's more important
than ever to look under the hood of the Federal Reserve. We need to
find out exactly what they are doing and why. That way, we can
determine if the Fed is actually hurting our economy and discouraging
job growth.
In a democracy, no government body should be allowed to hide behind a
curtain of secrecy. That's why I stand strongly behind this
legislation.
{time} 1540
Moment of Silence in Memory of Officer Jacob J. Chestnut and Detective
John M. Gibson
The SPEAKER pro tempore. Pursuant to the Chair's announcement of
earlier today, the House will now observe a moment of silence in memory
of Officer Jacob J. Chestnut and Detective John M. Gibson.
Will all present please rise in observance of a moment of silence.
Mr. CUMMINGS. Mr. Speaker, I yield 30 seconds to the gentleman from
Massachusetts (Mr. Frank).
Mr. FRANK of Massachusetts. Mr. Speaker, I'm glad that the Committee
on Government and Oversight isn't the
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official House historian. In fact, there was a motion to include
language like this offered to the financial reform bill. I voted
``no,'' as did Mr. Watt. It was included in the bill. It's true, I
voted for the bill. Of course, the gentleman from Texas voted against
the bill. So if your vote on the whole bill is taken as an account of
what you feel, he was against it.
But when it went to conference, it was not in the Senate bill--which
was the text of the conference--so it did not come up, and no
Republican conferee offered it as an amendment. That is, in the
conference, that language which I and the gentleman from North Carolina
voted against was not offered by any Member of the conference, Democrat
or Republican.
Mr. ISSA. History records that Democrats broadly voted for it when it
was voted out of this body. Nothing more need be said.
With that, I yield 1 minute to the gentlelady from Tennessee (Mrs.
Blackburn).
Mrs. BLACKBURN. I thank the gentleman from California for the time.
And I want to commend the gentleman from Texas (Mr. Paul) for his
excellent work on this issue.
Recently, I had a constituent say to me in a townhall meeting they
thought it was time for Congress to start putting some mandates on the
Federal Government. They're tired of government mandates on them. Why
don't we mandate, why don't we hold them accountable?
This is a piece of legislation that does exactly that. It requires
the GAO to conduct a full audit of the Board of Governors of the
Federal Reserve System and of the Federal Reserve banks by the
Comptroller General before the end of the year. That is significant. A
timeline to do a job, to be held accountable to the people of this
great Nation for how they spend their time, their money, the decisions
they make that affect us.
It is imperative that we get this economy back on track. The actions
that we will vote on today are part of that, having a Federal Reserve
that is accountable--accountable to our constituents, accountable to
the people of this Nation. I commend the gentleman for a move toward
transparency and accountability.
Mr. CUMMINGS. Mr. Speaker, may I inquire as to how much time we have.
The SPEAKER pro tempore. The gentleman from Maryland has 6\1/2\
minutes remaining. The gentleman from California has 9\1/4\ minutes
remaining.
Mr. CUMMINGS. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I rise today in opposition to H.R. 459, which passed out
of the Oversight Committee without even a single hearing and without
testimony from any Federal Reserve officials.
Let me be clear: the Government Accountability Office has had the
authority to audit the Federal Reserve's books for three decades. In
2010, the Dodd-Frank Act expanded the types of audits GAO conducts of
the Federal Reserve, as well as the data the Fed must disclose to the
public. For example, Dodd-Frank required the GAO to audit the emergency
financial assistance provided during the financial crisis.
The act also opens discount window operations and open market
operations to audit so GAO can assess the operational integrity,
collateral policies, fairness, and use of third-party contractors. And
Dodd-Frank requires the Federal Reserve to release information
regarding borrowers and counterparties participating in discount-
lending programs and open market operations. Mr. Speaker, as a conferee
who helped craft the final Dodd-Frank legislation, I supported all of
these provisions.
I believe other areas of the Federal Reserve's operations are also
ripe for audit. During the committee's consideration of this
legislation, I offered an amendment that would require GAO to perform
an audit of the independent foreclosure reviews currently being
conducted by the Federal Reserve and the Office of the Comptroller of
the Currency.
Fourteen mortgage servicers have been required to establish a process
under which borrowers can request an independent review of their loan
histories. But at the end of May, only 200,000 out of about 4.4 million
eligible borrowers had requested an independent review of their
foreclosure cases. We need to understand whether the design of the
program has limited the number of borrowers who have sought reviews of
their cases.
Further, it is unclear how the types and amounts of remediation are
being determined. This is precisely the type of issue that should be
reviewed by the GAO. Certainly, the public has a right and the Congress
has a responsibility to know and understand the transactions and
enforcement actions undertaken by the Nation's central bank. However,
when Congress established the Fed in 1913, it understood that
independence from political interference was critical to the bank's
ability to fulfill its monetary policy responsibilities.
The Dodd-Frank Act was carefully crafted to expand transparency while
preserving the protections that ensure the independence of the Federal
Reserve's internal deliberations on monetary policy matters. The Board
of Governors of the Federal Reserve must be able to pursue the policies
it considers most responsive to our Nation's current economic
conditions and most likely to fulfill its dual mandate of promoting
maximum employment and stable prices.
We should not allow GAO examinations to be the back door through
which politics intrude on monetary policy--which is what this
legislation would allow. Opening the Federal Reserve's internal policy
deliberations to GAO review could influence how such deliberations are
conducted and potentially the policies that are chosen, thus degrading
the Fed's independence.
Last week, the Chairman of the Federal Reserve, Mr. Bernanke,
described the potential impact of this bill to the Financial Services
Committee. He said:
The nightmare scenario I have is one in which some future
Fed Chairman would decide and say to raise the Federal funds
rate to 25 basis points and somebody would say, I don't like
that decision. I want the GAO to go in and get all the
records, get all the transcripts, get all the preparatory
materials and give us an independent opinion whether or not
that was the right decision.
I share Chairman Bernanke's concern. For that reason, during the
markup of this legislation in the Oversight Committee, I offered an
amendment that would have retained the protections for the Board of
Governors' internal monetary policy deliberations to ensure that the
audit required by this legislation did not intrude on the Federal
Reserve's independence. I continue to believe this provision is needed
to ensure this bill does not prohibit the ability of the Federal
Reserve to implement monetary policies to strengthen our Nation's
economy as it has done repeatedly throughout the recent financial
crisis.
I reserve the balance of my time.
Mr. ISSA. Mr. Speaker, can I inquire how much time we both have
remaining, please.
The SPEAKER pro tempore. The gentleman from California has 9\1/4\
minutes remaining. The gentleman from Maryland has 2 minutes remaining.
Mr. ISSA. I now yield 1 minute to the gentlelady from Kansas (Ms.
Jenkins).
Ms. JENKINS. I thank the gentleman for yielding, and I thank Dr. Paul
for his leadership on this very important issue.
Mr. Speaker, the Federal Reserve lent out $16 trillion during the
fiscal crisis. That's larger than the entire U.S. economy--or worse,
our Federal debt. Trillions of taxpayer dollars, and we have very
little understanding of where it went.
Congress holds the purse, but we have no oversight over how the Fed
manages the funds. This is why I've cosponsored a bipartisan effort to
audit the Fed in full. It's our responsibility.
Current monetary policy audits of the Fed are insufficient. Most Fed
operations consist of transactions with foreign central banks, and yet
they are exempt from review. When corruption is suspected, a common
refrain is: follow the money. With the historic sovereign debt crisis
brewing in Europe, we must look closely at our own balance sheet. We
must follow the money.
As a CPA, I know we need more transparency in Washington. It should
start with the Federal Reserve.
{time} 1550
Mr. CUMMINGS. I yield 1 minute to the gentleman from Ohio (Mr.
Kucinich).
Mr. KUCINICH. I would like to include in the record of this debate an
article about the Fed's policy model
[[Page H5155]]
sacrificing its maximum employment mandate and targeting 5 to 6 percent
as unemployment.
Speech by Janet L. Yellen, Vice Chair, Board of Governors of the
Federal Reserve System at the Boston Economic Club Dinner, Boston,
Massachusetts June 6, 2012
Perspectives on Monetary Policy
Good evening. I'm honored to have the opportunity to
address the Boston Economic Club and I'm grateful to Chip
Case for inviting me to speak to you tonight. As most of you
probably know, Chip was one of the first economists to
document worrisome signs of a housing bubble in parts of the
United States. After sounding an early alarm in 2003, Chip
watched the bubble grow and was prescient in anticipating the
very serious toll that its unwinding would impose on the
economy. Chip recognized that declining house prices would
affect not just residential construction but also consumer
spending, the ability of households to borrow, and the health
of the financial system. In light of these pervasive
linkages, the repeat sales house price index that bears
Chip's name is one of the most closely watched of all U.S.
economic indicators. Indeed, as I will discuss this evening,
prolonged weakness in the housing sector remains one of
several serious headwinds facing the U.S. economy. Given
these headwinds, I believe that a highly accommodative
monetary policy will be needed for quite some time to help
the economy mend. Before continuing, let me emphasize that my
remarks reflect my own views and not necessarily those of
others in the Federal Reserve System.
Economic Conditions and the Outlook
In my remarks tonight, I will describe my perspective on
monetary policy. To begin, however, I'll highlight some of
the current conditions and key features of the economic
outlook that shape my views. To anticipate the main points,
the economy appears to be expanding at a moderate pace. The
unemployment rate is almost 1 percentage point lower than it
was a year ago, but we are still far from full employment.
Looking ahead, I anticipate that significant headwinds will
continue to restrain the pace of the recovery so that the
remaining employment gap is likely to close only slowly. At
the same time, inflation (abstracting from the transitory
effects of movements in oil prices) has been running near 2
percent over the past two years, and I expect it to remain at
or below the Federal Open Market Committee's (the FOMC's) 2
percent objective for the foreseeable future. As always,
considerable uncertainty attends the outlook for both growth
and inflation; events could prove either more positive or
negative than what I see as the most likely outcome. That
said, as I will explain, I consider the balance of risks to
be tilted toward a weaker economy.
Starting with the labor market, conditions have gradually
improved over the past year, albeit at an uneven pace.
Average monthly payroll gains picked up from about 145,000 in
the second half of 2011 to 225,000 during the first quarter
of this year. However, these gains fell back to around 75,000
a month in April and May. The deceleration of payroll
employment from the first to the second quarter was probably
exacerbated by some combination of seasonal adjustment
difficulties and an unusually mild winter that likely boosted
employment growth earlier in the year. Payback for that
earlier strength probably accounts for some of the weakness
we've seen recently. Smoothing through these fluctuations,
the average pace of job creation for the year to date, as
well as recent unemployment benefit claims data and other
indicators, appear to be consistent with an economy expanding
at only a moderate rate, close to its potential.
Such modest growth would imply little additional progress
in the near term in improving labor market conditions, which
remain very weak. Currently, the unemployment rate stands
around 3 percentage points above where it was at the onset of
the recession--a figure that is stark enough as it is, but
does not even take account of the millions more who have left
the labor force or who would have joined under more normal
circumstances in the past four years. All told, only about
half of the collapse in private payroll employment in 2008
and 2009 has been reversed. A critical question for monetary
policy is the extent to which these numbers reflect a
shortfall from full employment versus a rise in structural
unemployment. While the magnitude of structural unemployment
is uncertain, I read the evidence as suggesting that the bulk
of the rise during the recession was cyclical, not structural
in nature.
Consider figure 1, which presents three indicators of labor
market slack. The black solid line is the unemployment gap,
defined as the difference between the actual unemployment
rate and the Congressional Budget Office (CBO) estimate of
the rate consistent with inflation remaining stable over
time. The red dashed line is an index of the difficulty
households perceive in finding jobs, based on results from a
survey conducted by the Conference Board. And the red dotted
line is an index of firms' ability to fill jobs, based on a
survey conducted by the National Federation of Independent
Business. All three measures show similar cyclical movements
over the past 20 years, and all now stand at very high
levels. This similarity runs counter to claims that the CBO's
and other estimates of the unemployment gap overstate the
true amount of slack by placing insufficient weight on
structural explanations, such as a reduced efficiency of
matching workers to jobs, for the rise in unemployment since
2007. If that were the case, why would firms now find it so
easy to fill positions? Other evidence also points to the
dominant role of cyclical forces in the recent rise in
unemployment: job losses have been widespread, rather than
being concentrated in the construction and financial sectors,
and the co-movement of job vacancies and unemployment over
the past few years does not appear to be unusual.
As I mentioned, I expect several factors to restrain the
pace of the recovery and the corresponding improvement in the
labor market going forward. The housing sector remains a
source of very significant headwinds. Housing has typically
been a driver of economic recoveries, and we have seen some
modest improvement recently, but continued uncertainties over
the direction of house prices, and very restricted mortgage
credit availability for all but the most creditworthy buyers,
will likely weigh on housing demand for some time to come.
When housing demand does pick up more noticeably, the huge
overhang of both unoccupied dwellings and homes in the
foreclosure pipeline will likely allow a good deal of that
demand to be met for a time without a sizeable expansion in
homebuilding. Moreover, the enormous toll on household wealth
resulting from the collapse of house prices--almost a 35
percent decline from its 2006 peak, according to the Case-
Shiller index--imposes ongoing restraint on consumer
spending, and the loss of home equity has impaired many
households' ability to borrow.
A second headwind that will likely become more important
over coming months relates to fiscal policy. At the federal
level, stimulus-related policies are scheduled to wind down,
while both defense and nondefense purchases are expected to
decline in inflation-adjusted terms over the next several
years. Toward the end of this year, important decisions
regarding the extension of current federal tax and budget
policies loom. I will return to the associated uncertainties
and their potentially detrimental effects later.
A third factor weighing on the outlook is the likely
sluggish pace of economic growth abroad. Strains in global
financial markets have resurfaced in recent months,
reflecting renewed uncertainty about the resolution of the
European situation. Risk premiums on sovereign debt and other
securities have risen again in many European countries, while
European banks continue to face pressure to shrink their
balance sheets. Even without a further intensification of
stresses, the slowdown in economic activity in Europe will
likely hold back U.S. export growth. Moreover, the perceived
risks surrounding the European situation are already having a
meaningful effect on financial conditions here in the United
States, further weighing on the prospects for U.S. growth.
Given these formidable challenges, most private sector
forecasters expect only gradual improvement in the labor
market and I share their view. Figure 2 shows the
unemployment rate together with the median forecast from last
month's Survey of Professional Forecasters (SPF), the dashed
blue line. The figure also shows the central tendency of the
unemployment projections that my FOMC colleagues and I made
at our April meeting: Those projections reflect our
assessments of the economic outlook given our own individual
judgements about the appropriate path of monetary policy.
Included in the figure as well is the central tendency of
FOMC participants' estimates of the longer-run normal
unemployment rate, which ranges from 5.2 percent to 6
percent. Like private forecasters, most FOMC participants
expect the unemployment rate to remain well above its longer-
run normal value over the next several years.
Of course, considerable uncertainty attends this outlook:
The shaded area provides an estimate of the 70 percent
confidence interval for the future path of the unemployment
rate based on historical experience and model simulations.
Its width suggests that these projections could be quite far
off, in either direction. Nevertheless, the figure shows that
labor market slack at present is so large that even a very
large and favorable forecast error would not change the
conclusion that slack will likely remain substantial for
quite some time.
Turning to inflation, figure 3 summarizes private and FOMC
forecasts. Overall consumer price inflation has fluctuated
quite a bit in recent years, largely reflecting movements in
prices for oil and other commodities. In early 2011 and again
earlier this year, prices of crude oil, and thus of gasoline,
rose noticeably. Smoothing through these fluctuations,
inflation as measured by the price index for personal
consumption expenditures (PCE) averaged near 2 percent over
the past two years. In recent weeks, however, oil and
gasoline prices have moderated and are now showing through to
the headline inflation figures. Looking ahead, most FOMC
participants at the time of our April meeting expected
inflation to be at, or a bit below, our long-run objective of
2 percent through 2014; private forecasters on average also
expect inflation to be close to 2 percent. As with
unemployment, uncertainty around the inflation projection is
substantial.
In the view of some observers; the stability of inflation
in the face of high unemployment in recent years constitutes
evidence
[[Page H5156]]
that much of the remaining unemployment is structural and not
cyclical. They reason that if there were truly substantial
slack in the labor market, simple accelerationist ``Phillips
curve'' models would predict more noticeable downward
pressure on inflation. However, substantial cross-country
evidence suggests that, in low-inflation environments,
inflation is notably less responsive to downward pressure
from labor market slack than it is when inflation is
elevated.
In other words, the short-run Phillips curve may flatten
out. One important reason for this non-linearity, in my view,
is downward nominal wage rigidity--that is, the reluctance or
inability of many firms to cut nominal wages.
The solid blue bars in figure 4 present a snapshot of the
distribution of nominal wage changes for individual jobs
during the depth of the current labor market slump, based on
data collected by the Bureau of Labor Statistics. For
comparison, the dashed red line presents a hypothetical
distribution of wage changes, using a normal distribution
that approximates the actual distribution of wage changes
greater than zero. The distribution of actual wage changes
shows that a relatively high percentage of workers saw no
change in their nominal wage, and relatively few experienced
modest wage cuts. This pile-up phenomenon at zero suggests
that, even when the unemployment rate was around 10 percent,
many firms were reluctant to cut nominal wage rates. In the
absence of this barrier, nominal gains in wages and unit
labor costs would have likely been even more subdued given
the severity of the economic downturn, with the result that
inflation would probably now be running at a lower rate.
Anchored inflation expectations are another reason why
inflation has remained close to 2 percent in the face of very
low resource utilization. As shown in figure 5, survey
measures of longer-horizon inflation expectations have
remained nearly constant since the mid-1990s even as actual
inflation has fluctuated. As a result, the current slump has
not generated the downward spiral of falling expected and
actual inflation that a simple accelerationist model of
inflation might have predicted. Indeed, keeping inflation
expectations from declining has been an important success of
monetary policy over the past few years. At the same time,
the fact that longer-term inflation expectations have not
risen above 2 percent has also proved extremely valuable, for
it has freed the FOMC to take strong actions to support the
economic recovery without greatly worrying that higher energy
and commodity prices would become ingrained in inflation and
inflation expectations, as they did in the 1970s.
While my modal outlook calls for only a gradual reduction
in labor market slack and a stable pace of inflation near the
FOMC's longer-run objective of 2 percent, I see substantial
risks to this outlook, particularly to the downside. As I
mentioned before, even without any political gridlock, fiscal
policy is bound to become substantially less accommodative
from early 2013 on. However, federal fiscal policy could turn
even more restrictive if the Congress does not reach
agreement on several important tax and budget policy issues
before the end of this year; in fact, the CBO recently warned
that the potential hit to gross domestic product (GDP) growth
could be sufficient to push the economy into recession in
2013. The deterioration of financial conditions in Europe of
late, coupled with notable declines in global equity markets,
also serve as a reminder that highly destabilizing outcomes
cannot be ruled out. Finally, besides these clearly
identifiable sources of risk, there remains the broader issue
that economic forecasters have repeatedly overestimated the
strength of the recovery and so still may be too optimistic
about the prospects that growth will strengthen.
Although I view the bulk of the increase in unemployment
since 2007 as cyclical, I am concerned that it could become a
permanent problem if the recovery were to stall. In this
economic downturn, the fraction of the workforce unemployed
for six months or more has climbed much more than in previous
recessions, and remains at a remarkably high level. Continued
high unemployment could wreak long-term damage by eroding the
skills and labor force attachment of workers suffering long-
term unemployment, thereby turning what was initially
cyclical into structural unemployment. This risk provides
another important reason to support the recovery by
maintaining a highly accommodative stance of monetary policy.
The Conduct of Policy with Unconventional Tools
Now turning to monetary policy, I will begin by discussing
the FOMC's reliance on unconventional tools to address the
disappointing pace of recovery. I will then elaborate my
rationale for supporting a highly accommodative policy
stance.
As you know, since late 2008, the FOMC's standard policy
tool, the target federal funds rate, has been maintained at
the zero lower bound. To provide further accommodation, we
have employed two unconventional tools to support the
recovery--extended forward guidance about the future path of
the federal funds rate, and large-scale asset purchases and
other balance sheet actions that have greatly increased the
size and duration of the Federal Reserve's portfolio.
These two tools have become increasingly important because
the recovery from the recession has turned out to be
persistently slower than either the FOMC or private
forecasters anticipated. Figure 6 illustrates the magnitude
of the disappointment by comparing Blue Chip forecasts for
real GDP growth made two years ago with ones made earlier
this year. As shown by the dashed blue line, private
forecasters in early 2010 anticipated that real GDP would
expand at an average annual rate of just over 3 percent from
2010 through 2014. However, actual growth in 2011 and early
2012 has turned out to be much weaker than expected, and, as
indicated by the dotted red line, private forecasters now
anticipate only a modest acceleration in real activity over
the next few years.
In response to the evolving outlook, the FOMC has
progressively added policy accommodation using both of its
unconventional tools. For example, since the federal funds
rate target was brought down to a range of 0 to \1/4\ percent
in December 2008, the FOMC has gradually adjusted its forward
guidance about the anticipated future path of the federal
funds rate. In each meeting statement from March 2009 through
June 2011, the Committee indicated its expectation that
economic conditions ``are likely to warrant exceptionally low
levels of the federal funds rate for an extended period.'' At
the August 2011 meeting, the Committee decided to provide
more specific information about the likely time horizon by
substituting the phrase ``at least through mid-2013'' for the
phrase ``for an extended period''; at the January 2012
meeting, this horizon was extended to ``at least through late
2014.'' Has this guidance worked? Figure 7 illustrates how
dramatically forecasters' expectations of future short-term
interest rates have changed. As the dashed blue line
indicates, the Blue Chip consensus forecast made in early
2010 anticipated that the Treasury-bill rate would now stand
at close to 3\1/2\ percent; today, in contrast, private
forecasters expect short-term interest rates to remain very
low in 2014.
Of course, much of this revision in interest rate
projections would likely have occurred in the absence of
explicit forward guidance; given the deterioration in
projections of real activity due to the unanticipated
persistence of headwinds, and the continued subdued outlook
for inflation, forecasters would naturally have anticipated a
greater need for the FOMC to provide continued monetary
accommodation. However, I believe the changes over time in
the language of the FOMC statement, coupled with information
provided by Chairman Bernanke and others in speeches and
congressional testimony, helped the public understand better
the Committee's likely policy response given the slower-than-
expected economic recovery. As a result, forecasters and
market participants appear to have marked down their
expectations for future short-term interest rates by more
than they otherwise would have, thereby putting additional
downward pressure on long-term interest rates, improving
broader financial conditions, and lending support to
aggregate demand.
The FOMC has also provided further monetary accommodation
over time by altering the size and composition of the Federal
Reserve's securities holdings, shown in figure 8. The
expansion in the volume of securities held by the Federal
Reserve is shown in the left panel of the figure. During 2009
and early 2010, the Federal Reserve purchased about $1.4
trillion in agency mortgage-backed securities and agency debt
securities and about $300 billion in longer-term Treasury
securities. In November 2010, the Committee initiated an
additional $600 billion in purchases of longer-term Treasury
securities, which were completed at the end of June of last
year. Last September, the FOMC decided to implement the
``Maturity Extension Program,'' which affected the maturity
composition of our Treasury holdings as shown in the right
panel. Through this program, the FOMC is extending the
average maturity of its securities holdings by selling $400
billion of Treasury securities with remaining maturities of 3
years or less and purchasing an equivalent amount of Treasury
securities with remaining maturities of 6 to 30 years. These
transactions are currently scheduled to be completed at the
end of this month.
Research by Federal Reserve staff and others suggests that
our balance sheet operations have had substantial effects on
longer-term Treasury yields, principally by reducing term
premiums on longer-dated Treasury securities. Figure 9
provides an estimate, based on Federal Reserve Board staff
calculations, of the cumulative reduction of the term premium
on 10-year Treasury securities from the three balance sheet
programs. These results suggest that our portfolio actions
are currently keeping 10-year Treasury yields roughly 60
basis points lower than they otherwise would be. Other
evidence suggests that this downward pressure has had
favorable spillover effects on other financial markets,
leading to lower long-term borrowing costs for households and
firms, higher equity valuations, and other improvements in
financial conditions that in turn have supported consumption,
investment, and net exports. Because the term premium effect
depends on both the Federal Reserve's current and expected
future asset holdings, most of this effect--without further
actions--will likely wane over the next few years as the
effect depends less and less on the current elevated level of
the balance sheet and increasingly on the level of holdings
during and after the normalization of our portfolio.
[[Page H5157]]
The Rationale for Highly Accommodative Policy
I have already noted that, in my view, an extended period
of highly accommodative policy is necessary to combat the
persistent headwinds to recovery. I will next explain how
I've reached this policy judgment. In evaluating the stance
of policy, I find the prescriptions from simple policy rules
a logical starting point. A wide range of such rules has been
examined in the academic literature, the most famous of which
is that proposed by John Taylor in his 1993 study. Rules of
the general sort proposed by Taylor (1993) capture well our
statutory mandate to promote maximum employment and price
stability by prescribing that the federal funds rate should
respond to the deviation of inflation from its longer-run
goal and to the output gap, given that the economy should be
at or close to full employment when the output gap--the
difference between actual GDP and an estimate of potential
output--is closed. Moreover, research suggests that such
simple rules can be reasonably robust to uncertainty about
the true structure of the economy, as they perform well in a
variety of models. Today, I will consider the prescriptions
of two such benchmark rules--Taylor's 1993 rule, and a
variant that is twice as responsive to economic slack. In my
view, this latter rule is more consistent with the FOMC's
commitment to follow a balanced approach to promoting our
dual mandate, and so I will refer to it as the ``balanced-
approach'' rule.
To show the prescriptions these rules would have called for
at the April FOMC meeting, I start with an illustrative
baseline outlook constructed using the projections for
unemployment, inflation, and the federal funds rate that FOMC
participants reported in April. I then employ the dynamics of
one of the Federal Reserve's economic models, the FRB/US
model, to solve for the joint paths of these three variables
if the short-term interest rate had instead been set
according to the Taylor (1993) rule or the balanced-approach
rule, subject, in both cases, to the zero lower bound
constraint on the federal funds rate. The dashed red line in
figure 10 shows the resulting path for the federal funds rate
under Taylor (1993) and the solid blue line with open circles
illustrates the corresponding path using the balanced-
approach rule. In both simulations, the private sector fully
understands that monetary policy follows the particular rule
in force. Figure 10 shows that the Taylor rule calls for
monetary policy to tighten immediately, while the balanced-
approach rule prescribes raising the federal funds rate in
the fourth quarter of 2014--the earliest date consistent with
the FOMC's current forward guidance of ``exceptionally low
levels for the federal funds rate at least through late
2014.''
Although simple rules provide a useful starting point in
determining appropriate policy, they by no means deserve the
``last word''--especially in current circumstances. An
alternative approach, also illustrated in figure 10, is to
compute an ``optimal control'' path for the federal funds
rate using an economic model--FRB/US, in this case. Such a
path is chosen to minimize the value of a specific ``loss
function'' conditional on a baseline forecast of economic
conditions. The loss function attempts to quantify the social
costs resulting from deviations of inflation from the
Committee's longer-run goal and from deviations of
unemployment from its longer-run normal rate. The solid green
line with dots in figure 10 shows the ``optimal control''
path for the federal funds rate, again conditioned on the
illustrative baseline outlook. This policy involves keeping
the federal funds rate close to zero until late 2015, four
quarters longer than the balanced-approach rule prescription
and several years longer than the Taylor rule. Importantly,
optimal control calls for a later lift-off date even though
this benchmark--unlike the simple policy rules--implicitly
takes full account of the additional stimulus to real
activity and inflation being provided over time by the
Federal Reserve's other policy tool, the past and projected
changes to the size and maturity of its securities holdings.
Figure 11 shows that, by keeping the federal funds rate at
its current level for longer, monetary policy under the
balanced-approach rule achieves a more rapid reduction of the
unemployment rate than monetary policy under the Taylor
(1993) rule does, while nonetheless keeping inflation near 2
percent. But the improvement in labor market conditions is
even more notable under the optimal control path, even as
inflation remains close to the FOMC's long-run inflation
objective.
As I noted, simple rules have the advantage of delivering
good policy outcomes across a broad range of models, and are
thereby relatively robust to our limited understanding of the
precise working of the economy--in contrast to optimal-
control policies, whose prescriptions are sensitive to the
specification of the particular model used in the analysis.
However, simple rules also have their shortcomings, leading
them to significantly understate the case for keeping policy
persistently accommodative in current circumstances.
One of these shortcomings is that the rules do not adjust
for the constraints that the zero lower bound has placed on
conventional monetary policy since late 2008. A second is
that they do not fully take account of the protracted nature
of the forces that have been restraining aggregate demand in
the aftermath of the housing bust. As I've emphasized, the
pace of the current recovery has turned out to be
persistently slower than most observers expected, and
forecasters expect it to remain quite moderate by historical
standards. The headwinds that explain this disappointing
performance represent a substantial departure from normal
cyclical dynamics. As a result, the economy's equilibrium
real federal funds rate--that is, the rate that would be
consistent with full employment over the medium run--is
probably well below its historical average, which the
intercept of simple policy rules is supposed to approximate.
By failing to fully adjust for this decline, the
prescriptions of simple policy rules--which provide a useful
benchmark under normal circumstances--could be significantly
too restrictive now and could remain so for some time to
come. In this regard, I think it is informative that the Blue
Chip consensus forecast released in March showed the real
three-month Treasury bill rate settling down at only 1\1/4\
percent late in the decade, down 120 basis points from the
long-run projections made prior to the recession.
Looking Ahead
Recent labor market reports and financial developments
serve as a reminder that the economy remains vulnerable to
setbacks. Indeed, the simulations I described above did not
take into account this new information. In our policy
deliberations at the upcoming FOMC meeting we will assess the
effects of these developments on the economic forecast. If
the Committee were to judge that the recovery is unlikely to
proceed at a satisfactory pace (for example, that the
forecast entails little or no improvement in the labor market
over the next few years), or that the downside risks to the
outlook had become sufficiently great, or that inflation
appeared to be in danger of declining notably below its 2
percent objective, I am convinced that scope remains for the
FOMC to provide further policy accommodation either through
its forward guidance or through additional balance-sheet
actions. In taking these decisions, however, we would need to
balance two considerations.
On the one hand, our unconventional tools have some
limitations and costs. For example, the effects of forward
guidance are likely to be weaker the longer the horizon of
the guidance, implying that it may be difficult to provide
much more stimulus through this channel. As for our balance
sheet operations, although we have now acquired some
experience with this tool, there is still considerable
uncertainty about its likely economic effects. Moreover, some
have expressed concern that a substantial further expansion
of the balance sheet could interfere with the Fed's ability
to execute a smooth exit from its accommodative policies at
the appropriate time. I disagree with this view: The FOMC has
tested a variety of tools to ensure that we will be able to
raise short-term interest rates when needed while gradually
returning the portfolio to a more normal size and
composition. But even if unjustified, such concerns could in
theory reduce confidence in the Federal Reserve and so lead
to an undesired increase in inflation expectations.
On the other hand, risk management considerations arising
from today's unusual circumstances strengthen the case for
additional accommodation beyond that called for by simple
policy rules and optimal control under the modal outlook. In
particular, as I have noted, there are a number of
significant downside risks to the economic outlook, and hence
it may well be appropriate to insure against adverse shocks
that could push the economy into territory where a self-
reinforcing downward spiral of economic weakness would be
difficult to arrest.
Conclusion
In my remarks this evening I have sought to explain why, in
my view, a highly accommodative monetary policy will remain
appropriate for some time to come. My views concerning the
stance of monetary policy reflect the FOMC's firm commitment
to the goals of maximum employment and stable prices, my
appraisal of the medium term outlook (which is importantly
shaped by the persistent legacy of the housing bust and
ensuing financial crisis), and by my assessment of the
balance of risks facing the economy. Of course, as I've
emphasized, the outlook is uncertain and the Committee will
need to adjust policy as appropriate as actual conditions
unfold. For this reason, the FOMC's forward guidance is
explicitly conditioned on its anticipation of ``low rates of
resource utilization and a subdued outlook for inflation over
the medium run.'' If the recovery were to proceed faster than
expected or if inflation pressures were to pick up
materially, the FOMC could adjust policy by bringing forward
the expected date of tightening. In contrast, if the
Committee judges that the recovery is proceeding at an
insufficient pace, we could undertake portfolio actions such
as additional asset purchases or a further maturity extension
program. It is for this reason that the FOMC emphasized, in
its statement following the April meeting, that it would
``regularly review the size and composition of its securities
holdings and is prepared to adjust those holdings as
appropriate to promote a stronger economic recovery in a
context of price stability.''
Mr. KUCINICH. I would also like to include in the record of this
debate an article from Bloomberg News that talks about how secret Fed
loans gave
[[Page H5158]]
banks billions that were undisclosed to Congress.
[From: Bloomberg Markets Magazine,
Nov. 27, 2011]
Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress
(By Bob Ivry, Bradley Keoun, and Phi Kuntz)
The Federal Reserve and the big banks fought for more than
two years to keep details of the largest bailout in U.S.
history a secret. Now, the rest of the world can see what it
was missing. The Fed didn't tell anyone which banks were in
trouble so deep they required a combined $1.2 trillion on
Dec. 5, 2008, their single neediest day. Bankers didn't
mention that they took tens of billions of dollars in
emergency loans at the same time they were assuring investors
their firms were healthy. And no one calculated until now
that banks reaped an estimated $13 billion of income by
taking advantage of the Fed's below-market rates, Bloomberg
Markets magazine reports in its January issue.
Saved by the bailout, bankers lobbied against government
regulations, a job made easier by the Fed, which never
disclosed the details of the rescue to lawmakers even as
Congress doled out more money and debated new rules aimed at
preventing the next collapse.
A fresh narrative of the financial crisis of 2007 to 2009
emerges from 29,000 pages of Fed documents obtained under the
Freedom of Information Act and central bank records of more
than 21,000 transactions. While Fed officials say that almost
all of the loans were repaid and there have been no losses,
details suggest taxpayers paid a price beyond dollars as the
secret funding helped preserve a broken status quo and
enabled the biggest banks to grow even bigger.
``Change Their Votes''
``When you see the dollars the banks got, it's hard to make
the case these were successful institutions,'' says Sherrod
Brown, a Democratic Senator from Ohio who in 2010 introduced
an unsuccessful bill to limit bank size. ``This is an issue
that can unite the Tea Party and Occupy Wall Street. There
are lawmakers in both parties who would change their votes
now.'' The size of the bailout came to light after Bloomberg
LP, the parent of Bloomberg News, won a court case against
the Fed and a group of the biggest U.S. banks called Clearing
House Association LLC to force lending details into the open.
The Fed, headed by Chairman Ben S. Bernanke, argued that
revealing borrower details would create a stigma--investors
and counterparties would shun firms that used the central
bank as lender of last resort--and that needy institutions
would be reluctant to borrow in the next crisis. Clearing
House Association fought Bloomberg's lawsuit up to the U.S.
Supreme Court, which declined to hear the banks' appeal in
March 2011.
$7.77 Trillion
The amount of money the central bank parceled out was
surprising even to Gary H. Stern, president of the Federal
Reserve Bank of Minneapolis from 1985 to 2009, who says he
``wasn't aware of the magnitude.'' It dwarfed the Treasury
Department's better-known $700 billion Troubled Asset Relief
Program, or TARP. Add up guarantees and lending limits, and
the Fed had committed $7.77 trillion as of March 2009 to
rescuing the financial system, more than half the value of
everything produced in the U.S. that year.
``TARP at least had some strings attached,'' says Brad
Miller, a North Carolina Democrat on the House Financial
Services Committee, referring to the program's executive-pay
ceiling. ``With the Fed programs, there was nothing.''
Bankers didn't disclose the extent of their borrowing. On
Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief
Executive Officer Kenneth D. Lewis wrote to shareholders that
he headed ``one of the strongest and most stable major banks
in the world.'' He didn't say that his Charlotte, North
Carolina-based firm owed the central bank $86 billion that
day.
``Motivate Others''
JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a
March 26, 2010, letter that his bank used the Fed's Term
Auction Facility ``at the request of the Federal Reserve to
help motivate others to use the system.'' He didn't say that
the New York-based bank's total TAF borrowings were almost
twice its cash holdings or that its peak borrowing of $48
billion on Feb. 26, 2009, came more than a year after the
program's creation.
Howard Opinsky, a spokesman for JPMorgan (JPM), declined to
comment about Dimon's statement or the company's Fed
borrowings. Jerry Dubrowski, a spokesman for Bank of America,
also declined to comment.
The Fed has been lending money to banks through its so-
called discount window since just after its founding in 1913.
Starting in August 2007, when confidence in banks began to
wane, it created a variety of ways to bolster the financial
system with cash or easily traded securities. By the end of
2008, the central bank had established or expanded ii lending
facilities catering to banks, securities firms and
corporations that couldn't get short-term loans from their
usual sources.
``Core Function''
``Supporting financial-market stability in times of extreme
market stress is a core function of central banks,'' says
William B. English, director of the Fed's Division of
Monetary Affairs. ``Our lending programs served to prevent a
collapse of the financial system and to keep credit flowing
to American families and businesses.''
The Fed has said that all loans were backed by appropriate
collateral. That the central bank didn't lose money should
``lead to praise of the Fed, that they took this
extraordinary step and they got it right,'' says Phillip
Swagel, a former assistant Treasury secretary under Henry M.
Paulson and now a professor of international economic policy
at the University of Maryland. The Fed initially released
lending data in aggregate form only. Information on which
banks borrowed, when, how much and at what interest rate was
kept from public view.
The secrecy extended even to members of President George W.
Bush's administration who managed TARP. Top aides to Paulson
weren't privy to Fed lending details during the creation of
the program that provided crisis funding to more than 700
banks, say two former senior Treasury officials who requested
anonymity because they weren't authorized to speak.
Big Six
The Treasury Department relied on the recommendations of
the Fed to decide which banks were healthy enough to get TARP
money and how much, the former officials say. The six biggest
U.S. banks, which received $160 billion of TARP funds,
borrowed as much as $460 billion from the Fed, measured by
peak daily debt calculated by Bloomberg using data obtained
from the central bank. Paulson didn't respond to a request
for comment.
The six--JPMorgan, Bank of America, Citigroup Inc. (C),
Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS) and
Morgan Stanley--accounted for 63 percent of the average daily
debt to the Fed by all publicly traded U.S. banks, money
managers and investment- services firms, the data show. By
comparison, they had about half of the industry's assets
before the bailout, which lasted from August 2007 through
April 2010. The daily debt figure excludes cash that banks
passed along to money-market funds.
Bank Supervision
While the emergency response prevented financial collapse,
the Fed shouldn't have allowed conditions to get to that
point, says Joshua Rosner, a banking analyst with Graham
Fisher & Co. in New York who predicted problems from lax
mortgage underwriting as far back as 2001. The Fed, the
primary supervisor for large financial companies, should have
been more vigilant as the housing bubble formed, and the
scale of its lending shows the ``supervision of the banks
prior to the crisis was far worse than we had imagined,''
Rosner says.
Bernanke in an April 2009 speech said that the Fed provided
emergency loans only to ``sound institutions,'' even though
its internal assessments described at least one of the
biggest borrowers, Citigroup, as ``marginal.''
On Jan. 14, 2009, six days before the company's central
bank loans peaked, the New York Fed gave CEO Vikram Pandit a
report declaring Citigroup's financial strength to be
``superficial,'' bolstered largely by its $45 billion of
Treasury funds. The document was released in early 2011 by
the Financial Crisis Inquiry Commission, a panel empowered by
Congress to probe the causes of the crisis.
``Need Transparency''
Andrea Priest, a spokeswoman for the New York Fed, declined
to comment, as did Jon Diat, a spokesman for Citigroup.
``I believe that the Fed should have independence in
conducting highly technical monetary policy, but when they
are putting taxpayer resources at risk, we need transparency
and accountability,'' says Alabama Senator Richard Shelby,
the top Republican on the Senate Banking Committee.
Judd Gregg, a former New Hampshire senator who was a lead
Republican negotiator on TARP, and Barney Frank, a
Massachusetts Democrat who chaired the House Financial
Services Committee, both say they were kept in the dark.
``We didn't know the specifics,'' says Gregg, who's now an
adviser to Goldman Sachs.
``We were aware emergency efforts were going on,'' Frank
says. ``We didn't know the specifics.''
Disclose Lending
Frank co-sponsored the Dodd-Frank Wall Street Reform and
Consumer Protection Act, billed as a fix for financial-
industry excesses. Congress debated that legislation in 2010
without a full understanding of how deeply the banks had
depended on the Fed for survival. It would have been
``totally appropriate'' to disclose the lending data by mid-
2009, says David Jones, a former economist at the Federal
Reserve Bank of New York who has written four books about the
central bank.
``The Fed is the second-most-important appointed body in
the U.S., next to the Supreme Court, and we're dealing with a
democracy,'' Jones says. ``Our representatives in Congress
deserve to have this kind of information so they can oversee
the Fed.''
The Dodd-Frank law required the Fed to release details of
some emergency-lending programs in December 2010. It also
mandated disclosure of discount-window borrowers after a two-
year lag.
Protecting TARP
TARP and the Fed lending programs went ``hand in hand,''
says Sherrill Shaffer, a banking professor at the University
of Wyoming in Laramie and a former chief economist at the New
York Fed. While the TARP
[[Page H5159]]
money helped insulate the central bank from losses, the Fed's
willingness to supply seemingly unlimited financing to the
banks assured they wouldn't collapse, protecting the
Treasury's TARP investments, he says.
``Even though the Treasury was in the headlines, the Fed
was really behind the scenes engineering it,'' Shaffer says.
Congress, at the urging of Bernanke and Paulson, created
TARP in October 2008 after the bankruptcy of Lehman Brothers
Holdings Inc. made it difficult for financial institutions to
get loans. Bank of America and New York-based Citigroup each
received $45 billion from TARP. At the time, both were
tapping the Fed. Citigroup hit its peak borrowing of $99.5
billion in January 2009, while Bank of America topped out in
February 2009 at $91.4 billion.
No Clue
Lawmakers knew none of this.
They had no clue that one bank, New York-based Morgan
Stanley (MS), took $107 billion in Fed loans in September
2008, enough to pay off one-tenth of the country's delinquent
mortgages. The firm's peak borrowing occurred the same day
Congress rejected the proposed TARP bill, triggering the
biggest point drop ever in the Dow Jones Industrial Average.
(INDU) The bill later passed, and Morgan Stanley got $10
billion of TARP funds, though Paulson said only ``healthy
institutions'' were eligible.
Mark Lake, a spokesman for Morgan Stanley, declined to
comment, as did spokesmen for Citigroup and Goldman Sachs.
Had lawmakers known, it ``could have changed the whole
approach to reform legislation,'' says Ted Kaufman, a former
Democratic Senator from Delaware who, with Brown, introduced
the bill to limit bank size.
Moral Hazard
Kaufman says some banks are so big that their failure could
trigger a chain reaction in the financial system. The cost of
borrowing for so-called too-big-to-fail banks is lower than
that of smaller firms because lenders believe the government
won't let them go under. The perceived safety net creates
what economists call moral hazard--the belief that bankers
will take greater risks because they'll enjoy any profits
while shifting losses to taxpayers.
If Congress had been aware of the extent of the Fed rescue,
Kaufman says, he would have been able to line up more support
for breaking up the biggest banks.
Byron L. Dorgan, a former Democratic senator from North
Dakota, says the knowledge might have helped pass legislation
to reinstate the Glass-Steagall Act, which for most of the
last century separated customer deposits from the riskier
practices of investment banking.
``Had people known about the hundreds of billions in loans
to the biggest financial institutions, they would have
demanded Congress take much more courageous actions to stop
the practices that caused this near financial collapse,''
says Dorgan, who retired in January.
Getting Bigger
Instead, the Fed and its secret financing helped America's
biggest financial firms get bigger and go on to pay employees
as much as they did at the height of the housing bubble.
Total assets held by the six biggest U.S. banks increased
39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8
trillion on the same day in 2006, according to Fed data.
For so few banks to hold so many assets is ``un-American,''
says Richard W. Fisher, president of the Federal Reserve Bank
of Dallas. ``All of these gargantuan institutions are too big
to regulate. I'm in favor of breaking them up and slimming
them down.''
Employees at the six biggest banks made twice the average
for all U.S. workers in 2010, based on Bureau of Labor
Statistics hourly compensation cost data. The banks spent
$146.3 billion on compensation in 2010, or an average of
$126,342 per worker, according to data compiled by Bloomberg.
That's up almost 20 percent from five years earlier compared
with less than 15 percent for the average worker. Average pay
at the banks in 2010 was about the same as in 2007, before
the bailouts.
``Wanted to Pretend''
``The pay levels came back so fast at some of these firms
that it appeared they really wanted to pretend they hadn't
been bailed out,'' says Anil Kashyap, a former Fed economist
who's now a professor of economics at the University of
Chicago Booth School of Business. ``They shouldn't be
surprised that a lot of people find some of the stuff that
happened totally outrageous.''
Bank of America took over Merrill Lynch & Co. at the urging
of then-Treasury Secretary Paulson after buying the biggest
U.S. home lender, Countrywide Financial Corp. When the
Merrill Lynch purchase was announced on Sept. 15, 2008, Bank
of America had $14.4 billion in emergency Fed loans and
Merrill Lynch had $8.1 billion. By the end of the month, Bank
of America's loans had reached $25 billion and Merrill
Lynch's had exceeded $60 billion, helping both firms keep the
deal on track.
Prevent Collapse
Wells Fargo bought Wachovia Corp., the fourth-largest U.S.
bank by deposits before the 2008 acquisition. Because
depositors were pulling their money from Wachovia, the Fed
channeled $50 billion in secret loans to the Charlotte, North
Carolina-based bank through two emergency-financing programs
to prevent collapse before Wells Fargo could complete the
purchase. ``These programs proved to be very successful at
providing financial markets the additional liquidity and
confidence they needed at a time of unprecedented
uncertainty,'' says Ancel Martinez, a spokesman for Wells
Fargo.
JPMorgan absorbed the country's largest savings and loan,
Seattle-based Washington Mutual Inc., and investment bank
Bear Stearns Cos. The New York Fed, then headed by Timothy F.
Geithner, who's now Treasury secretary, helped JPMorgan
complete the Bear Stearns deal by providing $29 billion of
financing, which was disclosed at the time. The Fed also
supplied Bear Stearns with $30 billion of secret loans to
keep the company from failing before the acquisition closed,
central bank data show. The loans were made through a program
set up to provide emergency funding to brokerage firms.
``Regulatory Discretion''
``Some might claim that the Fed was picking winners and
losers, but what the Fed was doing was exercising its
professional regulatory discretion,'' says John Deane, a
former speechwriter at the New York Fed who's now executive
vice president for policy at the Financial Services Forum, a
Washington-based group consisting of the CEOs of 20 of the
world's biggest financial firms. ``The Fed clearly felt it
had what it needed within the requirements of the law to
continue to lend to Bear and Wachovia.''
The bill introduced by Brown and Kaufman in April 2010
would have mandated shrinking the six largest firms.
``When a few banks have advantages, the little guys get
squeezed,'' Brown says. ``That, to me, is not what capitalism
should be.''
Kaufman says he's passionate about curbing too-big-to-fail
banks because he fears another crisis.
``Can We Survive?''
``The amount of pain that people, through no fault of their
own, had to endure--and the prospect of putting them through
it again--is appalling,'' Kaufman says. ``The public has no
more appetite for bailouts. What would happen tomorrow if one
of these big banks got in trouble? Can we survive that?''
Lobbying expenditures by the six banks that would have been
affected by the legislation rose to $29.4 million in 2010
compared with $22.1 million in 2006, the last full year
before credit markets seized up--a gain of 33 percent,
according to OpenSecrets.org, a research group that tracks
money in U.S. politics. Lobbying by the American Bankers
Association, a trade organization, increased at about the
same rate, OpenSecrets.org reported.
Lobbyists argued the virtues of bigger banks. They're more
stable, better able to serve large companies and more
competitive internationally, and breaking them up would cost
jobs and cause ``long-term damage to the U.S. economy,''
according to a Nov. 13, 2009, letter to members of Congress
from the FSF.
The group's website cites Nobel Prize-winning economist
Oliver E. Williamson, a professor emeritus at the University
of California, Berkeley, for demonstrating the greater
efficiency of large companies.
``Serious Burden''
In an interview, Williamson says that the organization took
his research out of context and that efficiency is only one
factor in deciding whether to preserve too-big-to-fail banks.
``The banks that were too big got even bigger, and the
problems that we had to begin with are magnified in the
process,'' Williamson says. ``The big banks have incentives
to take risks they wouldn't take if they didn't have
government support. It's a serious burden on the rest of the
economy.''
Deane says his group didn't mean to imply that Williamson
endorsed big banks.
Top officials in President Barack Obama's administration
sided with the FSF in arguing against legislative curbs on
the size of banks.
Geithner, Kaufman
On May 4, 2010, Geithner visited Kaufman in his Capitol
Hill office. As president of the New York Fed in 2007 and
2008, Geithner helped design and run the central bank's
lending programs. The New York Fed supervised four of the six
biggest U.S. banks and, during the credit crunch, put
together a daily confidential report on Wall Street's
financial condition. Geithner was copied on these reports,
based on a sampling of e-mails released by the Financial
Crisis Inquiry Commission.
At the meeting with Kaufman, Geithner argued that the issue
of limiting bank size was too complex for Congress and that
people who know the markets should handle these decisions,
Kaufman says. According to Kaufman, Geithner said he
preferred that bank supervisors from around the world,
meeting in Basel, Switzerland, make rules increasing the
amount of money banks need to hold in reserve. Passing laws
in the U.S. would undercut his efforts in Basel, Geithner
said, according to Kaufman.
Anthony Coley, a spokesman for Geithner, declined to
comment.
``Punishing Success''
Lobbyists for the big banks made the winning case that
forcing them to break up was ``punishing success,'' Brown
says. Now that they can see how much the banks were borrowing
from the Fed, senators might think differently, he says.
The Fed supported curbing too-big-to-fail banks, including
giving regulators the power to close large financial firms
and implementing tougher supervision for big banks, says Fed
General Counsel Scott G. Alvarez. The Fed didn't take a
position on whether large banks should be dismantled before
they get into trouble.
[[Page H5160]]
Dodd-Frank does provide a mechanism for regulators to break
up the biggest banks. It established the Financial Stability
Oversight Council that could order teetering banks to shut
down in an orderly way. The council is headed by Geithner.
``Dodd-Frank does not solve the problem of too big to
fail,'' says Shelby, the Alabama Republican. ``Moral hazard
and taxpayer exposure still very much exist.''
Below Market
Dean Baker, co-director of the Center for Economic and
Policy Research in Washington, says banks ``were either in
bad shape or taking advantage of the Fed giving them a good
deal. The former contradicts their public statements. The
latter--getting loans at below-market rates during a
financial crisis--is quite a gift.''
The Fed says it typically makes emergency loans more
expensive than those available in the marketplace to
discourage banks from abusing the privilege. During the
crisis, Fed loans were among the cheapest around, with
funding available for as low as 0.01 percent in December
2008, according to data from the central bank and money-
market rates tracked by Bloomberg.
The Fed funds also benefited firms by allowing them to
avoid selling assets to pay investors and depositors who
pulled their money. So the assets stayed on the banks' books,
earning interest.
Banks report the difference between what they earn on loans
and investments and their borrowing expenses. The figure,
known as net interest margin, provides a clue to how much
profit the firms turned on their Fed loans, the costs of
which were included in those expenses. To calculate how much
banks stood to make, Bloomberg multiplied their tax-adjusted
net interest margins by their average Fed debt during
reporting periods in which they took emergency loans.
Added Income
The 190 firms for which data were available would have
produced income of $13 billion, assuming all of the bailout
funds were invested at the margins reported, the data show.
The six biggest U.S. banks' share of the estimated subsidy
was $4.8 billion, or 23 percent of their combined net income
during the time they were borrowing from the Fed. Citigroup
would have taken in the most, with $1.8 billion.
``The net interest margin is an effective way of getting at
the benefits that these large banks received from the Fed,''
says Gerald A. Hanweck, a former Fed economist who's now a
finance professor at George Mason University in Fairfax,
Virginia.
While the method isn't perfect, it's impossible to state
the banks' exact profits or savings from their Fed loans
because the numbers aren't disclosed and there isn't enough
publicly available data to figure it out.
Opinsky, the JPMorgan spokesman, says he doesn't think the
calculation is fair because ``in all likelihood, such funds
were likely invested in very short-term investments,'' which
typically bring lower returns.
Standing Access
Even without tapping the Fed, the banks get a subsidy by
having standing access to the central bank's money, says
Viral Acharya, a New York University economics professor who
has worked as an academic adviser to the New York Fed.
``Banks don't give lines of credit to corporations for
free,'' he says. ``Why should all these government guarantees
and liquidity facilities be for free?''
In the September 2008 meeting at which Paulson and Bernanke
briefed lawmakers on the need for TARP, Bernanke said that if
nothing was done, ``unemployment would rise--to 8 or 9
percent from the prevailing 6.1 percent,'' Paulson wrote in
``On the Brink'' (Business Plus, 2010).
Occupy Wall Street
The U.S. jobless rate hasn't dipped below 8.8 percent since
March 2009, 3.6 million homes have been foreclosed since
August 2007, according to data provider RealtyTrac Inc., and
police have clashed with Occupy Wall Street protesters, who
say government policies favor the wealthiest citizens, in New
York, Boston, Seattle and Oakland, California.
The Tea Party, which supports a more limited role for
government, has its roots in anger over the Wall Street
bailouts, says Neil M. Barofsky, former TARP special
inspector general and a Bloomberg Television contributing
editor.
``The lack of transparency is not just frustrating; it
really blocked accountability,'' Barofsky says. ``When people
don't know the details, they fill in the blanks. They believe
in conspiracies.''
In the end, Geithner had his way. The Brown-Kaufman
proposal to limit the size of banks was defeated, 60 to 31.
Bank supervisors meeting in Switzerland did mandate minimum
reserves that institutions will have to hold, with higher
levels for the world's largest banks, including the six
biggest in the U.S. Those rules can be changed by individual
countries. They take full effect in 2019.
Meanwhile, Kaufman says, ``we're absolutely, totally, 100
percent not prepared for another financial crisis.''
This is all about disclosure and accountability. You know, the Fed's
not some kind of hocus-pocus, black box operation. The Fed essentially
supplants the constitutional mandate in article I, section 8 that
belongs to the Congress of the United States.
Let's look at some recent history here: 2008, subprime meltdown,
collateralized debt obligations go back to mortgage-backed securities.
Neighborhoods in Cleveland melting down, people losing their homes. The
Fed looked the other way.
And we're saying, don't go into the Fed; it will be political. Yes,
it's political. We have unemployment because of politics. We have
people losing their homes because of politics. We have banks getting
uncalculated amounts of money from the Federal Reserve, and we don't
even know about it.
Meanwhile, people can't get a loan to keep their home or keep their
business.
Audit the Fed? You bet we should audit the Fed. We have to have
accountability. It's time the Congress stood up for its constitutional
role. Article I, section 8: power to coin and create money.
It's time that we stood up for America's 99 percent. It's time that
we stood up to the Federal Reserve that right now acts like it's some
kind of high, exalted priesthood, unaccountable in a democracy.
Let's change that by voting for the Paul bill.
Mr. ISSA. I yield 1 minute to the gentlewoman from Wyoming (Mrs.
Lummis).
Mrs. LUMMIS. Mr. Speaker, before the financial crisis, the Fed's
lending to the financial system was minimal, and monetary policy was
limited; but since 2008, they've tripled their balance sheet and
transacted nearly $16 trillion in loans.
Clearly, Congress has delegated monetary policy to the Fed; and I,
for one, am not advocating that we abolish the Fed. But Congress
retains oversight responsibility, and Congress should insist on an
accurate accounting of the Fed so Members of Congress can better
understand monetary policy.
Our colleague, Ron Paul, was instrumental in getting an audit of the
Fed's emergency activities during the financial crisis, but
restrictions remain in place on examining monetary policy actions such
as quantitative easing and assisting failing banks in Europe.
When the Fed's cumulative lending hits the size and scope to be
greater than the entire GDP of the United States, it's past time for
Congress to insist on transparency.
Mr. CUMMINGS. Mr. Speaker, I reserve the balance of my time.
Mr. ISSA. I yield myself 2 minutes.
Mr. Speaker, it appears as though we agree on certain things. We
agree that some transparency is required. We certainly agree, on a
bipartisan basis, that what the GAO did, under Dodd-Frank, at a
minimum, was a good thing. I think there's no question my colleague who
was here earlier, Mr. Frank, certainly would agree to the numbers, the
expansion of the Fed in that period that Mrs. Lummis talked about
between 2008 and now.
I think we would all agree the Federal Reserve is the people's bank.
It is broadly owned by 316 or 320 million Americans.
I served on the board of a public company, one that I founded. I
understand that if you have more than 500 stockholders, you have an
obligation to considerable disclosure.
Although the Fed is audited to see whether, basically, some numbers
are correct or not on a limited basis, the truth is the Federal Reserve
is not open and transparent, not even years after they make decisions.
I think the American people have a piercing question right now, one
that is not the question that Dr. Paul was asking when he first wanted
to audit the Fed. The question is, Will we be like Greece? Will we be
like Germany? Will we be like the trauma that's sweeping over the
European Union?
Do we, in fact, know the true numbers? Do we know the extent of the
leverage and the policies and the accuracy and the knowledge of the
Federal Reserve?
I think calmly we have to ask that question. Do we know what we need
to know, or are we willing to not know, in hopes that we won't be
political because we don't know?
I've been in Congress for 12 full years at the end of this term, and
I've learned one thing: Congress has a tendency to do two things well:
nothing at
[[Page H5161]]
all, and overreact. I trust today will be a day in which we're in
between.
The SPEAKER pro tempore. The time of the gentleman has expired.
Mr. ISSA. I yield myself an additional minute.
We would do something so that we would know more a year from now than
we know today. We would not overreact. We would not want to stifle what
the Fed has done historically, without an awful lot more study. Changes
to an entity like the Central Bank should be done thoughtfully and over
time.
My friend, Dr. Paul, would like to do more than this bill does; but
this minimal effort, offered on a bipartisan basis, is offered today
because we believe the American people have a right to know, an
interest to know, and a need to know.
With that, I reserve the balance of my time.
Mr. CUMMINGS. I yield 1 minute to the gentleman from Missouri (Mr.
Clay).
Mr. CLAY. Mr. Speaker, I rise in support of H.R. 459. This bill
directs the Comptroller General to conduct an audit of the Federal
Reserve.
Since 1982, the GAO has had authority to audit the Federal Reserve
Board and Bank, subject to exceptions for monetary policy-related
decisions and activities.
In 2009, Congress provided authority for the GAO to audit actions by
the Fed under section 13(3) of the Federal Reserve Act to lend to any
single and specific partnership or corporation, notwithstanding the
generally applicable monetary policy-related exceptions.
In 2010, the Dodd-Frank Wall Street Reform Act added new audit
authorities. In addition, GAO has conducted a number of other reviews
of Federal Reserve activities; but we need a full audit, and I urge my
colleagues to vote for the bill.
Mr. ISSA. Mr. Speaker, could I inquire how much time is available.
The SPEAKER pro tempore. The gentleman from California has 4\1/4\
minutes remaining. The time of the gentleman from Maryland has expired.
Mr. ISSA. Mr. Speaker, I won't use all of our time.
I have a slightly different opinion than the ranking member's. I
believe regular order has been followed on this bill, followed and then
some.
This is something that Dr. Paul has worked on, on a bipartisan basis,
with Republican Presidents and Democratic Presidents, with Republican
Congresses and Democratic Congresses. The support for this, as you saw
here today, goes to Republicans and Democrats, Progressives,
Conservatives, Blue Dogs.
The American people want to know. I don't believe the American people
are afraid to know. Of course, the American people would not be
comfortable with interference with the Fed, with micromanaging policy
decisions, with tearing down the institution.
But, in fact, I think that the 9/11 of the financial market, if you
will, the meltdown in 2008 and 2009, $1 trillion nearly in TARP money,
and countless trillions in expansion of the balance sheet, have taught
us one thing: what we don't know can hurt us.
Now, before 9/11 of the financial market, before the meltdown, before
Lehman Brothers and Bear, Stearns evaporated, we would have thought,
well, there are some very smart people on Wall Street, and we'd have
been right. But smart people can be wrong.
We put very good people on the Federal Reserve Board. We choose very
good chairmen. Chairman Bernanke was a choice of Republicans and
Democrats alike.
But, ultimately, looking over the shoulder by Congress, by my
committee, by the Financial Services Committee, just to ask the
question, are those numbers undeniable truths brought down on tablets;
or are they, in fact, open to second guessing after the fact,
questioning of whether or not a model works or whether there is just a
small, but meaningful, opportunity for tens of trillions of dollars to
fall on the backs of the American people if they got it wrong?
{time} 1600
That's the question the American people asked, and after 2008, it's a
question Congress must ask.
When Chairman Frank voted for Ron Paul's bill, perhaps he didn't want
it, but he voted for it as did countless Democrats. Ultimately, it was
reduced--but not eliminated--in conference. There was some recognition
that it needed to be audited.
Today, what we are doing is asking to send to the Senate a piece of
legislation that more purely and clearly says: I believe the American
people have a right to know. Perhaps the Senate will take up a slightly
different version. Perhaps it will be truly a one-time audit. Perhaps
it will be limited.
The American people need to hold us in the House and our counterparts
in the Senate responsible, that we do know what we need to know and
that we will never again say we rely on other people to be so smart
that we shouldn't look over their shoulders. That's not the America
that I grew up in. It's not the clear and transparent America the
American people are asking for.
With that, I urge the passage of this bipartisan bill, and I yield
back the balance of my time.
Mr. YOUNG of Florida. Mr. Speaker, I rise in strong support of H.R.
459, the Federal Reserve Transparency Act. I am an original cosponsor
of this important measure and I have long supported Representative
Paul's efforts to authorize a full audit of the Federal Reserve by the
Government Accountability Office (GAO).
In 2009, I conducted a ``We the People Town Hall By Mail'' and asked
my constituents how they felt about several issues before the Congress.
Of the 32,000 Pinellas County residents who responded, 95 percent said
they supported a full audit of the Federal Reserve.
The Constitution gives the Congress the authority to coin money and
to regulate the dollar's value. In an effort to remove politics from
decisions about monetary policy, the Congress outsourced this
responsibility to an independent Federal Reserve almost one hundred
years ago.
Unfortunately, for too long the Fed has operated in secret. Current
law actually prohibits the Congress from having access to all of the
Federal Reserve's books. The GAO serves as Congress's watchdog, and
should be allowed to audit the Fed just as it does other agencies. Only
through increased transparency can the Congress conduct the necessary
oversight of the Fed and hold it accountable for the American people.
This institution plays an important role in managing the dollar and the
American people deserve to know what is being done to our currency.
One of the few good provisions of the Dodd-Frank financial reform
legislation was that it permitted a limited audit of the Federal
Reserve's response to the financial crisis. What the GAO uncovered in
this limited audit was astonishing. Between December 2007 and July
2010, Fed committed trillions of dollars to backstop hundreds of
financial institutions. Some of the largest of recipients of this aid
were even foreign banks. According to Bloomberg News, ``the Fed and its
secret financing helped America's biggest financial firms get bigger
and go on to pay employees as much as they did at the height of the
housing bubble.''
Much of this emergency action was run through the Federal Reserve
Bank of New York, which at that time was headed by Tim Geithner, who is
now President Obama's Treasury Secretary.
The Fed has continued its extraordinary tactics. In addition to
holding the federal funds rate at practically zero since December 2008,
the Fed has engaged in programs called Quantitative Easing 1,
Quantitative Easing 2, and Operation Twist. In 2011 alone, the Fed's
balance sheet grew by 20 percent. The Federal Reserve says it will
likely hold interest rates at ``exceptionally low levels'' through 2014
and there is speculation that it will soon implement a third round of
quantitative easing.
Mr. Speaker, this legislation has broad support from all sides. In
fact, it seems like the only one who opposes H.R. 459 is the Chairman
of the Federal Reserve Ben Bernanke. My question would be: ``What is
there to hide?'' We should have passed this legislation long ago, and
it is my hope that my colleagues in the Senate will follow the House's
lead and act quickly to approve the Federal Reserve Transparency Act so
that we can finally shine a light on the Fed's policies.
Mr. GINGREY of Georgia. Mr. Speaker, I rise in strong support of H.R.
459, the Federal Reserve Transparency Act of 2012, and I would like to
commend our colleague from Texas, Dr. Ron Paul, who has worked
tirelessly as the author of this legislation for a number of years.
With its ability to control monetary supply policy, the Federal
Reserve is arguably the most powerful entity of the federal government.
Yet, despite this power, current law specifically prevents Congress
from fully auditing the monetary policy actions the Fed takes that
impact each of us on a daily basis.
[[Page H5162]]
Mr. Speaker, as a proud cosponsor of H.R. 459, I believe it is well
past time to change that policy. This legislation would simply require
the Comptroller General to conduct a full audit of the Federal Reserve
before the end of 2012.
At a time when the Federal Reserve has expanded its balance sheet to
$3 trillion as of last month, the American people deserve to have
transparency and accountability when it comes to our monetary supply
policy. I urge all of my colleagues to support H.R. 459.
Mrs. MILLER of Michigan. Mr. Speaker, in America we believe in
freedom, in democracy and in the belief that in this country the people
rule. And in order for the people to rule responsibly they must have
knowledge and information about the handling of our economy.
Unfortunately, the American people are denied the basic information
they need on one of the most important pillars of our economy, the
Federal Reserve.
Today the Federal Reserve operates in secrecy. It creates money out
of thin air, it can make purchases of questionable assets from friendly
Wall Street firms and it can loan hundreds of billions of dollars to
foreign governments and central banks--all out of the sight of the
American people and even policy makers in Washington.
It is time to lift the veil of secrecy by passing H.R. 459, the
Federal Reserve Transparency Act.
This bill will allow for a thorough audit of the Fed, including
transactions with foreign governments, central banks and the decision
making process in setting monetary policy.
We should never fear transparency in a free society--it is vital--and
we should embrace it. Today I urge my colleagues to join me in
supporting this bill which provides for a long overdue audit of the
Fed.
Mr. TIPTON. Mr. Speaker, the ability to provide oversight of the
Federal Reserve's dealings is hindered by current law that prohibits
the Government Accountability Office from auditing aspects of the
Bank's activities including monetary policy matters and transactions
with foreign entities. H.R. 459 would remove these and other
restrictions on GAO audits of the Federal Reserve, increasing
transparency.
It defies common sense that there is currently no full oversight over
the Federal Reserve, which sets the monetary policy that impacts every
American citizen and holds a balance sheet of $3 trillion. H.R. 459
will increase transparency of the Federal Reserve by allowing a full
audit of all aspects of the bank's dealings including the decision-
making behind its monetary policy. The ability to fully audit the
Federal Reserve is long overdue, and this bill is a victory for all who
strive for a more transparent government.
Mr. MICA. Mr. Speaker, I rise in strong support of legislation that
will provide greater transparency within our Federal Reserve System.
H.R. 459, the Federal Reserve Transparency Act, requires an audit of
that agency. As a cosponsor, I urge my colleagues to join me in voting
for this crucial piece of legislation. In order to get our financial
house in order, we must take all necessary steps to ensure the Federal
Reserve, which sets the conditions for the free market to thrive; is
operating in the most efficient manner possible. The auditing of the
Federal Reserve is the first step in inspecting this important level of
government for financial and regulatory waste and inefficiency.
It was recently revealed that the New York District Federal Reserve
had previous knowledge of dangers threatening our financial markets
before the financial market collapsed in 2007. The New York Fed, led
then by Treasury Secretary Timothy Geithner, had knowledge that certain
rates were being manipulated but failed to act. Auditing the Federal
Reserve will pinpoint responsibility, foster accountability and provide
Congress and the American people with transparency over this powerful
Federal entity. Our Nation's central bank should not be exempt from
financial audit, especially with the immense financial power it
controls. In its hands lies the fate of our country's financial
stability.
As I have worked to uncover waste throughout government as Chairman
of the House Transportation Committee and as a senior member of the
House Oversight and Government Reform Committee, I must insist that our
Nation's financial operators be subject to the same level of scrutiny.
An audit is the first positive step in that direction, and I will
continue to work for passage of the Federal Reserve Transparency Act.
The SPEAKER pro tempore. The question is on the motion offered by the
gentleman from California (Mr. Issa) that the House suspend the rules
and pass the bill, H.R. 459, as amended.
The question was taken.
The SPEAKER pro tempore. In the opinion of the Chair, two-thirds
being in the affirmative, the ayes have it.
Mr. CUMMINGS. Mr. Speaker, on that I demand the yeas and nays.
The yeas and nays were ordered.
The SPEAKER pro tempore. Pursuant to clause 8 of rule XX, further
proceedings on this question will be postponed.
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