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H.R. 1207, THE FEDERAL RESERVE 

TRANSPARENCY ACT OF 2009 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 25, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–80 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

September 25, 2009 .......................................................................................... 1 

Appendix: 

September 25, 2009 .......................................................................................... 57 

WITNESSES 

FRIDAY, SEPTEMBER 25, 2009 

Alvarez, Scott G., General Counsel, Board of Governors of the Federal Reserve System ......................................................................................................... 12 

Woods, Thomas E., Jr., Ph.D., Ludwig von Mises Institute ................................. 45 

APPENDIX 

Prepared statements: 

Garrett, Hon. Scott ........................................................................................... 58 

Marchant, Hon. Kenny ..................................................................................... 59 

Alvarez, Scott G. ............................................................................................... 60 

Woods, Thomas E., Jr. ..................................................................................... 71 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachus, Hon. Spencer: 

Financial Services Committee Republican Plan for Reforming the Financial Regulatory System ................................................................................. 74 

Text of H.R. 3310, To reform the financial regulatory system of the 

United States, and for other purposes ........................................................ 80 

Foster, Hon. Bill: 

Responses to questions submitted to Scott Alvarez ....................................... 84 

Watt, Hon. Melvin: 

‘‘Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet,’’ dated September 2009 ............................. 168 

Minutes of the Federal Open Market Committee, August 11–12, 2009 ...... 199 

Federal Reserve press release, dated September 23, 2009 ........................... 209 

Editorial from The Wall Street Journal entitled, ‘‘Economists Warn Fed 

Independence at Risk,’’ dated July 15, 2009 ............................................... 210 

Petition from The Wall Street Journal entitled, ‘‘Petition for Fed Independence,’’ dated July 15, 2009 ................................................................... 212 

(1) 

H.R. 1207, THE FEDERAL RESERVE 

TRANSPARENCY ACT OF 2009 

Friday, September 25, 2009 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 9:01 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Watt, Sherman, Moore 

of Kansas, Lynch, Miller of North Carolina, Green, Cleaver, Perlmutter, Donnelly, Foster, Minnick, Adler, Grayson, Himes, Maffei; 

Bachus, Castle, Royce, Paul, Manzullo, Biggert, Capito, Hensarling, 

Garrett, Neugebauer, Price, McHenry, Putnam, Bachmann, McCarthy of California, Posey, Jenkins, Paulsen, and Lance. 

The CHAIRMAN. The hearing will come to order. 

And I will begin with a little history. This is an historic hearing. 

The gentleman from Texas, Mr. Paul, filed this bill for the first 

time in 1983. There then ensued a number of things, including 12 

years in which the Republican Party controlled the agenda of this 

committee and found no time for this hearing. 

I am very pleased in this show of bipartisanship to have been the 

one to give this important piece of legislation its first hearing ever, 

indeed. And I think this history is relevant, because we ought to 

be very clear this is not a partisan issue. 

The first time this committee, in my experience, having come 

here in 1981, engaged with the Federal Reserve—and I think it 

really was true of the 1970’s and 1960’s, as well—but the first time 

this committee dealt with the questions of openness and transparency of the Federal Reserve was under the leadership of the 

great chairman who is pictured over my right shoulder, Henry B. 

Gonzalez. 

In fact, a former chief economist of this committee, Robert 

Auerbach, has written a book, and I get no share of the proceeds, 

but it is entitled, ‘‘Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan’s Bank.’’ It is a description of the efforts by Mr. Gonzalez, ultimately successful, to compel the Federal 

Reserve to be more open, and it isn’t pretty. 

It is astonishing to me to remember that, when I first came here, 

the decisions of the Open Market Committee were never announced. Now, how you influence interest rates by concealing from 

the market what you decided to do is very odd. What it shows is 

that the penchant for secrecy outweighed the desire to be effective, 

because it clearly could not have been as effective to have a secret 

2 

directive to the markets, which, of course, got leaked and distorted, 

etc. 

There were minutes that had been taken at Federal Reserve 

meetings. The Federal Reserve, at the time, 1983, denied—or in 

the later 1980’s, when Mr. Gonzalez became chairman—that there 

had been minutes. They were later ‘‘found in a drawer.’’ There were 

not reports released. 

This is not a new thing for this committee. There was an effort 

to open it up, and there was significant increased opening. 

The other point that is relevant, and I do want to say to make 

sure this is not a partisan issue, facts on the record: In 2003, the 

gentleman from Texas, Mr. Paul, was in line under seniority to be 

the chairman of the Domestic Monetary Policy Subcommittee. That 

subcommittee immediately disappeared. It was merged into the 

International Monetary Policy Subcommittee, because there were 

people who were trying to shield the Federal Reserve from Mr. 

Paul’s influence. 

Two years later, when they could not merge that subcommittee 

further into the Housing Subcommittee, although they probably 

thought about it, a member of this committee with some seniority 

who had not previously taken a subcommittee chairmanship, Congresswoman Pryce, was persuaded to come over and do this. 

This is the first time since the bill was filed and despite a bipartisan ignoring of the issue that we have had the hearing. And we 

are serious about some legislation in this regard. 

I will say I have a couple of concerns. The Federal Reserve engages in considerable market activity. They buy and sell. I do believe that it is important in our society that the buying and selling 

be made public. We don’t want public entities buying and selling 

securities with nobody ever knowing. 

I also believe, however, that some time needs to elapse so that 

their buying and selling does not have a direct market effect, so 

that other people can’t ride on it. 

So that is one area where I will be working with the gentleman 

from Texas, and we have discussed it. We want there to be publicity; we don’t want there to be a market effect in the near term. 

We don’t want people trading with the Fed or against the Fed, etc. 

As to monetary policy, I think it is also clear, I believe and have 

exercised that right for some time to comment on monetary policy. 

The notion that no elected official should ever comment on something as important as monetary policy is profoundly antidemocratic. And I believe that we should continue to do that. It is something I have been doing since I got here. 

We don’t want to give the rest of the world or, more importantly, 

domestic investors, the impression that we are somehow, in a formal way, injecting Congress into the setting of monetary policy, because I think that could have a very destabilizing effect. I don’t 

think that will be hard to do without, in any way, interfering with 

the audit function. 

But how the Federal Reserve carries out what it is doing, its buying and selling, what it buys and what it sells—all of those, given 

its importance, can entirely and legitimately be made open. 

And I will say this: There were predictions. One of the things 

that the media fails to do is, the media rarely passes up a chance 

3 

to refute those of us who are in office, but they get bored too easily. 

There are often predictions of doom whenever people in Congress 

propose to do something. Very often, those predictions of doom go 

unrealized, and there is too little checking. 

I urge people, if you are interested in this, to go back to some 

of the predictions that were made in the late 1980’s, when under 

the leadership of Henry Gonzalez, the Fed was not—didn’t legislate, but was pressured to make some changes. Read about the predictions of doom, and note that none of them came to pass. 

I believe that we are similarly able, in a wholly response way, 

without in any way interfering with the independence of the monetary policy-setting function or with the integrity of the markets, to 

go forward with completing the job. And I would say ‘‘completing’’ 

the job. It really did begin with Henry Gonzalez, but completing it. 

A lot needs to be done, and the gentleman from Texas has been in 

the lead in pushing for that, of making sure that this important 

part of our Federal Government is subjected to the same rules of 

openness that every other element in a democratic government 

should be. 

The gentleman from Texas. 

Dr. PAUL. I thank you, Mr. Chairman, for calling this hearing, 

finally. It is very good that we are having this today. 

I would like to say that, at the present time, we have 295 cosponsors of the bill in the House. And a recent poll showed that 75 percent of the American people support the auditing of the Fed. 

But I wanted to start, too, with a little bit of history. In 1981, 

we were holding a gold conference hearing. Don Regan was in 

charge of the very first hearing, and he insisted that no media be 

allowed in, no guests would be allowed in, no records be kept. And 

that got out on the outside, and, due to public pressure, the meetings were finally open. And his argument was, well, it would affect 

interest rates, it would affect the dollar, and it would be detrimental to the market. 

So a lot of these arguments are thrown out there unnecessarily. 

But too often we equate this idea of independence with secrecy. If 

we substitute the word ‘‘secrecy’’ every time we talk about independence, we will know what we are talking about. 

One time many years ago, Arthur Burns was asked about whether or not the Fed had to do what the President wanted. And he 

said, ‘‘Obviously, it does, or it would lose its independence.’’ And 

that is about it. It is very, very politicized, but it is done in secrecy. 

The President has influence, and we do know that; there have been 

books written about this. As well as what is happening now, there 

is a political influence by private companies and banks and foreign 

governments and foreign central banks. And the American people 

deserve to know this. 

One of the charges made is that, if we have these audits, all of 

a sudden we are going to take over monetary policy. Chairman 

Frank and I, as he has just stated, have talked about this. We are 

going to make it very, very clear that it is not our intent to take 

over monetary policy. 

But, quite frankly, the way the bill is written, I don’t believe we 

could, and I don’t believe we should either. Although there are two 

sides of this issue arguing for the audit, we don’t necessarily agree 

4 

with what monetary policy we should have. So that is not the issue 

here. 

But one thing one should think about is this argument that, if 

we have an audit, we are going to influence policy. How many audits does the GAO perform? In all agencies of government—in the 

State Department, in the DOD—nobody has ever charged the GAO 

for altering policies. So I don’t think that is a fair charge, that we 

would be taking over policy. 

Actually, transparency conveys trust. It was found that in these 

recent bailouts, instead of it hurting companies if they knew they 

were being helped by the government, it actually helped those companies, their stocks went up, rather than saying that they became 

tainted just because they knew they were talking to the Federal 

Reserve or to Treasury. 

Today, we have before us a bill that actually offers an opportunity that the people have been fighting for, for a good many 

years. Chairman of the Banking Committee Royce, as well as 

Wright Patman and Gonzalez, they have all argued this case. But 

the conditions today merit serious consideration for this bill and 

passage of a bill like this. 

The American people know it, and they understand it better than 

ever before because of the crisis of the financial system. It is not 

because of me. Like it was said, I did it for a good many years, and 

nothing happened. But the financial crisis has gotten the attention 

of the American people, and the American people say, ‘‘Not only do 

you have a right to do this, as a Member of Congress and as Congress itself, you have an obligation to do this.’’ 

So I am delighted that we have gotten to this point, and I am 

sure that we will have a positive discussion today. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from North Carolina— 

Mr. WATT. Thank you, Mr. Chairman. 

The CHAIRMAN. —for as much time as he consumes. 

Mr. WATT. First of all, I want to thank the Chair for convening 

this hearing and doing so at the full committee level. The chairman 

and I have had some discussions about whether to do a hearing of 

this kind at the subcommittee level or at the full committee level. 

And I think the chairman is correct, that this is a subject that deserves discussion by the entire committee, not just at the Domestic 

Monetary Policy Subcommittee level. 

I want to supplement the history that both the Chair and Mr. 

Paul have already stated in the record. Mr. Paul is the ranking 

member of the Subcommittee on Domestic Monetary Policy. And, 

while this is the first hearing directly on the bill that has been introduced by Mr. Paul, we have had several tangential discussions 

of this in the subcommittee, in various ways. And Mr. Paul has had 

an opportunity to question the Fed about this. We have done it, 

though, in the context of the regulatory reform discussions that we 

have been having. And I will come back to that in just a little bit. 

Perhaps, other than general regulatory reform itself and health 

care reform, there is probably not another issue on which I get 

more contacts from people out in the public. I am not sure they are 

all my constituents, but certainly people mobilized are on this 

5 

issue. And most of them identify, in general, with the position that 

Mr. Paul has outlined in his legislation. 

In a sense, I think the question is not whether there will be some 

kind of increased audit of the Federal Reserve, but how that will 

take place. And I think there are three issues that arise there 

when we try to define how that will take place. 

Two of those issues, the major issues, I think, have been outlined 

by the Chair of the full committee in his opening statement. And 

I suspect that most, if not all, of the subcommittee and I hope all 

of the full committee would agree that whatever we do would be 

done within the constraints outlined by the Chair in his opening 

statement. 

The second issue is whether we would do it inside or outside the 

issue of regulatory reform, whether there would be a separate bill 

on this issue, or whether it would be done in the context of regulatory reform. 

Mr. Paul and I have had some discussions about this. And it has 

been my position, although not so strong that I would fight either 

him or the Chair of the full committee about it, that whatever we 

are going to do on this issue probably ought to be done in the context of regulatory reform. Because, right now, we are not sure what 

the full territory of the Federal Reserve will be once regulatory reform gets done. And whatever audit provisions we adopt ought to 

be consistent with the new Fed authority rather than consistent 

with just the Fed’s authority as it currently has. 

And the third issue is one that I think maybe the general public 

is not quite as aware of because, when the general public thinks 

of an audit, they think of an audit of the kind that accountants do 

in the regular course of business. A GAO audit, on the other hand, 

is a lot more expansive, or can be a lot more expansive, than a 

CPA’s audit of a business. It can get into really second-guessing a 

lot of procedures. And that can get touchy, especially if we were 

dealing with monetary policy issues, which I think we need to try 

to stay away from as vigorously as we can. 

But all of those issues, I think, are issues on which Mr. Paul’s 

bill has stimulated extensive and good and constructive discussion 

about and issues that I think will be and can be resolved in the 

context of either an independent, free-standing bill or in the context of regulatory reform. 

I think having this hearing at the full committee level formalizes 

a process for getting to a result that all of us are hopeful that we 

will be able to get to. And I thank the Chair, again, for convening 

the hearing. 

I thank Mr. Paul for being an articulate and determined and 

long-standing advocate of this position. He certainly has pushed 

the issue forward, and I think he is going to get some great results 

out of his efforts. 

The CHAIRMAN. I thank the gentleman. 

I would just say—because we have 15 on each side, and we are 

not going to use it all up on this side, so I will take a minute— 

the gentleman from North Carolina has been a great asset as Chair 

of the Domestic Monetary Policy Subcommittee. We are having this 

in full committee because there was a lot of interest from a lot of 

members, so it just made it easier to do that. But his guidance has 

6 

been very helpful. And I very much agree with the points he added 

that we will be approaching. 

And now I recognize the ranking member of this committee, who 

was also the first member of the committee to, in fact, appoint Mr. 

Paul to the position of some responsibility over the Fed, the gentleman from Alabama, Mr. Bachus. 

Mr. BACHUS. Thank you, Mr. Chairman. And I think that appointing Dr. Paul to this position has proved to be a wise decision. 

Mr. Chairman, this hearing is on the Federal Reserve Transparency Act of 2009, which is sponsored by our colleague Dr. Paul 

and, I think, the vast majority of the Republicans on the committee. 

In his role as ranking member of the Subcommittee on Domestic 

Monetary Policy and Technology, Dr. Paul has been a consistent 

champion of the taxpayer and a strong advocate for greater transparency and accountability at the Federal Reserve. 

Americans are tired of paying for Wall Street’s mistakes with 

costly bailouts, many of which have been funded by the Federal Reserve. Over the last year-and-a-half, the Fed has used its authority 

under Section 13(3) of the Federal Reserve Act to conduct a series 

of extraordinary interventions into the financial markets that have 

doubled the size of its balance sheet to over $2 trillion. 

In fact, in testimony yesterday before the committee, former Federal Reserve Chairman Paul Volcker expressed his own misgivings 

about invoking 13(3). He said, ‘‘I have mixed feelings about that because I squirm when it is used, frankly. We spend a lot of time trying to avoid its use because we knew, if it ever got used, it would 

become a precedent of the future.’’ That is why the Republicans on 

this committee have introduced our alternative reform bill, which 

actually does not allow the Fed to invoke 13(3) to bail out specific 

institutions. 

Most of us were at the hearing the day before yesterday when 

we urged Secretary Geithner to say there would be no bailouts and 

he would not be invoking 13(3). And he actually declined to say 

that he wouldn’t use it and use as much as a trillion dollars in a 

bailout, which should have shocked a lot of people and should have 

been headline news around this country. 

Just this week, the Federal Open Market Committee voted 

unanimously to extend its program to purchase $1.2 trillion worth 

of mortgage-backed securities and up to $200 billion of agency debt 

through the first quarter of next year. In fact, before our eyes, we 

are seeing what Chairman Frank said last year when we said, with 

President Obama and a strong Democratic Senate, we can get the 

Federal Government back in the housing business. We are seeing 

that happen. He was right. 

In fact, if we are talking about the Federal Reserve, they are the 

biggest holder of U.S. Government debt—not private companies, 

not China, not the Middle East. It is the Federal Reserve. They are 

buying, according to the Wall Street Journal, 50 percent of all new 

treasuries issued by the Treasury. That was in the second quarter. 

And they buy a good portion of the GSE bonds that Fannie Mae 

and Freddie Mac issued. 

So you have one government agency buying another government 

agency’s debt. We have shifted debt from the private sector onto 

7 

the U.S. Government taxpayers’ back. And now we have one government agency, in a way, bailing out another government agency. 

It is a classic example of the Fed bailing out the Federal Reserve, 

the Fannie bailing out the Treasury. 

And, you know, you wonder who is going to bail out the U.S. 

Government. And I think the taxpayers have figured out it is we, 

the taxpayers. And that is one reason why we desperately need this 

legislation. 

The CHAIRMAN. Let me just say to the gentleman, the Minority 

has now used 8 minutes and 20 seconds. 

Mr. BACHUS. I yield back. 

The CHAIRMAN. You had other members who wanted to do 1-minutes. And we were asked, including by Dr. Paul, to get to the testimony. 

Mr. BACHUS. Mr. Chairman, we did—like, Mr. Watt went over— 

The CHAIRMAN. No. We have 15 minutes on each side. 

Mr. BACHUS. Okay. 

The CHAIRMAN. I understand that. But you had more people who 

wanted to speak. Mr. Watt didn’t go over—we will not use up our 

full 15 minutes. You had a list of 8 people who wanted 1 minute. 

We are going to run out of time, and Mr. Paul did ask— 

Mr. BACHUS. No, you are right. I yield back. 

The CHAIRMAN. I now recognize the gentleman from North Carolina for a unanimous consent request. 

Mr. WATT. Thank you, Mr. Chairman. 

In your opening statement, Mr. Chairman, you mentioned several aspects in which the Fed is making an effort to be transparent. 

I wanted to ask unanimous consent to introduce, first, a Federal 

Open Markets Committee press release, which is an example of 

something that comes out immediately after the Federal Open 

Market Committee meets. 

Second, the Federal Open Market Committee’s minutes, a sample 

that comes out a few weeks after the Federal Open Market Committee meets. 

And, third, the Federal monthly liquidity and balance sheet report that comes out monthly, showing the actual disposition of the 

various funds that they— 

The CHAIRMAN. Is there any objection? 

Without objection, it is so ordered. 

And we will now take several of the Republican members, who 

are down for 1 minute. The gentleman from Delaware was down 

for 1 minute. 

Mr. CASTLE. Thank you, Mr. Chairman. 

We are rapidly approaching the 1-year anniversary of the enactment of the Emergency Economic Stabilization Act, the bill that 

authorized the Troubled Asset Relief Program, TARP, as we know 

it. 

Since that time, the House Financial Services Committee has 

held multiple oversight hearings, received updates from the Congressional Oversight Panel, read the reports of the Special Inspector General for TARP, and been regularly updated on the $700 billion taxpayer-funded stabilization program by the Government Accountability Office, GAO. 

8 

So why haven’t we taken any of these rigorous oversight and accountability steps in tracking the $2 trillion in assistance provided 

by the Federal Reserve in response to the economic crisis? We 

know about the statutory restrictions to protect its independence, 

which excludes certain oversight mechanisms. But I believe that 

the advancing of money here has gone far beyond that. 

While I understand the need of the Federal Reserve to maintain 

that relative independence and some level of confidentiality to 

maintain its policies, we must allow the GAO to provide independent analysis of its actions. 

It is clear to me and over 290 of my congressional colleagues who 

also cosponsor H.R. 1207 that statutory changes are needed to further scrutinize the activities of the Federal Reserve. We must have 

a clear understanding of how Federal funds have been utilized, 

whether successfully or unsuccessfully. 

I yield back the balance of my time. 

The CHAIRMAN. The gentleman from California, Mr. Royce, is 

recognized for 1 minute. 

Mr. ROYCE. Thank you, Mr. Chairman. 

I am one of the House Members who signed on to the Federal 

Reserve Transparency Act. I signed not because I would like to see 

the Federal Reserve brought closer to the political process but because I deeply am concerned about the massive expansion of this 

so-called safety net under our financial system. 

If we go back to 1999, 45 percent of the liabilities in our financial 

system were under this net, according to the Federal Reserve. 

Today, that number is far greater. And whether or not you agree 

with the steps taken in recent months to prop up financial institutions, it is apparent that the Federal Reserve became the path of 

least resistance for many of these bailouts. 

As we look toward reforming the financial system, it is essential 

that we adequately understand the extent to which the Federal 

Government and the Federal Reserve have enhanced that safety 

net and exacerbated the potential moral-hazard problem that 

comes with it, a moral-hazard problem that, I would argue, had a 

lot to do with the original financial crisis. We are now repeating 

it. 

Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. The gentlewoman from Illinois, Ms. Biggert, for 

1 minute. 

Mrs. BIGGERT. Thank you, Mr. Chairman, and thank you for 

holding this hearing today. I also want to thank our colleague, Dr. 

Paul, for introducing H.R. 1207 and for his leadership on this issue. 

I cosponsored the bill. I heard from a lot of my constituents about 

this. And, in addition, I think it is important that the American 

taxpayers know how and why the Fed issues over $2 trillion to stabilize certain financial institutions in order to stabilize the markets. 

To restore public confidence in our financial markets and our 

government, and for the benefit of consumers, taxpayers, and our 

economy, we must increase transparency as well as enact significant reforms to our regulatory structure. H.R. 1207 is one piece of 

that. 

9 

I look forward to today’s hearing and yield back the balance of 

my time. 

The CHAIRMAN. The gentleman from Massachusetts, Mr. Lynch, 

for 21⁄2 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

This hearing is a long time coming, and I appreciate the gentleman from Texas sponsoring this bill, the Federal Reserve Transparency Act of 2009. 

I would like to welcome our witnesses and thank them for helping the committee with its work. 

Not surprisingly, Mr. Paul’s bill has received an increasing 

amount of attention over the last 18 months, as the economy has 

worsened and the Federal Reserve began a series of extraordinary 

measures to stabilize the markets. I think all of our offices received 

calls regarding this bill, very many in my district in support. And 

I do welcome the opportunity to discuss the legislation further. 

The crash of Lehman Brothers last fall demonstrated the complexities and interconnectedness of the market, an issue that this 

committee continues to address. 

The Fed enjoys a number of privileges that extend to no other 

agency in Washington. The Fed raises its own revenue, it drafts its 

own operating budget, and it submits nothing to Congress. There 

is an obligation on the Fed Chairman to appear a couple times a 

year, under Humphrey-Hawkins, but the information there is just 

to tell us what the range of targets are for monetary growth. And 

I think there has been a general secrecy around the Fed that has 

heightened the anxiety of the American people on how the Fed is 

handling its responsibility. 

Many believe more can be done. I know that Chairman Bernanke 

has tried to bring a little bit more transparency in recent months, 

but I think people believe more can be done, especially as this committee considers increasing the Fed’s responsibility as a systemic 

regulator. 

I look forward to the testimony of our witnesses to further debate 

on this issue. And I yield back the balance of my time. Thank you, 

Mr. Chairman. 

The CHAIRMAN. The gentleman saved us 43 seconds. And now I 

recognize the gentleman from Texas, Mr. Hensarling, for 1 minute. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

To borrow from an old ad campaign, this is not your father’s Federal Reserve. We have a Federal Reserve that has now promulgated rules on credit cards, mortgages, and executive compensation, not to mention helping to create trillions of dollars of taxpayer 

liability exposure. 

Clearly, exigent powers for the Federal Reserve are important, 

but they must be constrained. There is a huge difference between 

providing emergency liquidity facilities broadly in our economy and 

becoming an institution for serial institutionalized bailouts. 

Independence of the Fed remains a very important issue, but 

that needs to be in the context of a Federal Reserve that tends to 

monetary policy, preferably tied to inflation targets. 

I am very happy to cosponsor Dr. Paul’s bill. I appreciate his 

leadership. I think it is the first step to helping create more transVerDate Nov 24 2008 17:39 Apr 09, 2010 Jkt 054871 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\54871.TXT TERRIE
10 

parency and more accountability as we move forward on this important issue. 

And I yield back the balance of my time. 

The CHAIRMAN. The gentleman from New Jersey for 1 minute. 

Mr. GARRETT. I thank the chairman for holding this hearing 

after all these many years and Dr. Paul for introducing this legislation. 

Preserving the Federal Reserve’s independence in conducting its 

monetary policy is cited by Mr. Alvarez in his testimony and by 

others as a reason to oppose the Federal Reserve Transparency 

Act. But, you know, Allan Meltzer, who is one of the most prominent academic experts on Fed policy in history, recently declined 

to join others in signing a petition to preserve the central bank’s 

independence because, he said, ‘‘The Fed is rarely independent, and 

it strikes me that being independent is very unlikely in this current environment.’’ 

According to the Wall Street Journal article, he went on to explain that ‘‘History is replete in instances where the Fed bended 

to political pressure, keeping interest rates low in the 1930’s and 

1940’s to help finance the New Deal and to keep them low again 

in the 1960’s to finance the Great Society, leading of course to inflation to follow.’’ 

So I am hoping that we can explore, at this time, the premise 

some more at today’s hearing of how independent is the Fed, really. 

Because if history shows it has never truly been independent, then 

there is no independence to protect, which leads us to ask, what 

is it really that the people are interested in protecting? 

Thank you. 

The CHAIRMAN. The gentleman from Georgia is recognized for 1 

minute. 

Mr. PRICE. Thank you, Mr. Chairman. 

As cosponsor of this legislation, I want to applaud Representative 

Paul for his dedication and oversight for oversight and accountability of the Federal Reserve. 

The Fed has truly shown a remarkable willingness to initiate unprecedented intervention into financial markets. These actions 

have ballooned the Fed’s balance sheet to over $2.1 trillion. Most 

recently, it has been reported that the Fed is currently drafting a 

proposal to regulate compensation arrangements for private-sector 

companies, including those that have received no Federal dollars. 

So expanding their balance sheet, increasing regulatory authority, setting private-sector compensation has left many of us wondering, where does the Fed find its authority, and shouldn’t there 

be greater oversight? 

Clearly, more transparency is needed to get at the heart of the 

Federal Reserve. Representative Paul’s bill is an important first 

step in reining in what has become an increasingly activist governmental body. 

I want to commend Mr. Paul, and I call on the chairman of the 

committee to hold more frequent and regular hearings with the Fed 

Chair to shed further light and give greater opportunity for congressional oversight. 

And I yield back. 

11 

The CHAIRMAN. The ranking member and I have agreed to an additional minute-and-a-half on each side so we will be able to accommodate everybody who is here. 

And now Mr. Grayson is recognized for 1 minute. 

Mr. GRAYSON. Thank you, Mr. Chairman. 

One of the most important elements of the bill is that it has 292 

cosponsors and represents a new model of bipartisanship that I 

hope will take hold all through Congress. This is not a Republican 

issue; this is not a Democratic issue. This is a bill that was introduced originally in 1983, when I was still in school, and now is finally coming to fruition. It is long overdue. 

I think we all can agree, left and right, middle, center, up, down, 

whatever your political persuasion, that the Fed needs to be accountable to the American people, and that is exactly what this bill 

accomplishes. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from Minnesota for 1 minute. 

Mrs. BACHMANN. Thank you, Mr. Chairman, and Mr. Paul. 

The Federal Reserve is an institution known as much for the 

broad powers over the financial marketplace as for its sense of secrecy about its decision-making. 

Shining more light on the Fed’s books gained a fresh head of 

steam after the Fed exercised its Section 13(3) powers to bail out 

Bear Stearns in March of 2007. This power allows the Fed to lend 

to anyone it wants in unusual and exigent circumstances. It also 

led to an initial $85 billion bailout of AIG that later rose to more 

than $150 billion. 

This plan promotes more accountability from the Fed by requiring that it obtain Treasury’s approval to act under Section 13(3), 

and giving Congress the ability to disapprove of any action taken 

under that authority. 

Congress requires transparency of publicly-traded companies for 

its shareholders. Government should not be held to a lower standard vis-a-vis the taxpayers. The stake we hold in the Fed is just 

as real; it deserves just as much respect. 

Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. The gentlewoman from Kansas for 1 minute. 

Ms. JENKINS. Thank you, Mr. Chairman. 

Recently, we have seen the American people step up to express 

frustration: frustration with the increased size of government, frustration with debt, frustration with reckless spending, and now frustration with health care reform. They are demanding accountability 

out of their government officials, and I firmly believe our government works best when it is accountable. And to be held accountable, government must be open and transparent. 

The Federal Reserve has a duty, a duty to make economic decisions independent of politics. Yet, in the end, it must be, first and 

foremost, accountable. The Fed has recently taken small steps to 

increase transparency, but I am eager to hear today exactly what 

they are doing to ensure greater access and accountability to the 

folks back home. 

I yield back. 

The CHAIRMAN. And I will yield myself the final minute remaining on our side. 

12 

First, the gentleman from Georgia puzzled me when said he 

called on me to have more hearings. We have regularly had hearings. We have had the Chairman here on several occasions. We 

have had other officials, the Vice Chairman. I am not aware of any 

request from the Minority to hold a hearing on the Fed that was 

not honored. And, in most cases, we didn’t wait for those requests. 

There has been a continuous series of hearings, more, I believe, recently than ever before, with the Fed, although that is justified by 

the increased role the Fed has. 

Secondly, the gentleman from North Carolina raised the point 

about how to do this. There were some who said, ‘‘Well, don’t do 

this as part of overall reform. Do it as a standalone.’’ And there 

was reference to Section 13(3). Well, there is nothing in this bill 

about Section 13(3). That doesn’t mean the bill is wrong, but, in 

fact, the great power the Fed has, that it has had since 1932, to 

intervene in the economy, isn’t touched by this bill. I think we 

should put constraints on 13(3); I plan to do it. That is why I think 

the gentleman from North Carolina is right when he said this 

should, I believe, be part of an overall approach. 

The time for opening statements has expired, as has probably the 

patience of the audience. They seem to have gone out together. So 

we will now hear from Mr. Alvarez. 

STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. ALVAREZ. Chairman Frank, Ranking Member Bachus, Congressman Paul, and other members of the committee, I appreciate 

the opportunity to testify on H.R. 1207, the Federal Reserve Transparency Act of 2009. 

The Federal Reserve is accountable to the Congress and the public and is committed to maximum transparency, consistent with the 

effective performance of our responsibilities. 

To facilitate that transparency and effective oversight, we provide the Congress and the public detailed information concerning 

the full range of our policy actions, operations, and financial accounts. Federal Reserve officials testify frequently before the Congress on all aspects of the Federal Reserve’s responsibilities and operations. And the Board’s Chairman testifies and provides a special 

report to the Congress semiannually on the state of economy and 

on the Federal Reserve’s actions to meet the monetary policy objectives that Congress has established. 

The Federal Open Market Committee releases a statement describing its monetary policy decisions immediately after each regularly scheduled meeting and publishes detailed minutes of each 

meeting 3 weeks later. 

In addition, the financial statements for the Federal Reserve System are audited annually by an independent public accounting firm 

and made available to the public. We also provide Congress a detailed annual report that reviews all aspects of the Federal Reserve’s policy actions and operations during the year. 

Now, we recognize that the extraordinary actions that the Federal Reserve has taken during the financial crisis to promote financial stability and implement monetary policy must be accompanied 

by additional transparency. For these reasons, we have substanVerDate Nov 24 2008 17:39 Apr 09, 2010 Jkt 054871 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\54871.TXT TERRIE
13 

tially increased both the type and amount of information that we 

disclose concerning our liquidity and asset purchase programs. We 

have added significant new information to the balance sheets that 

we publish each week and have created a special section of the 

Board’s Web site that offers considerable new and detailed information about our policy programs and financial activities. 

We have initiated a detailed monthly report to the Congress on 

our liquidity programs and balance sheet that includes information 

on the size of each facility, the collateral supporting the facility, 

and the types of borrowers. We continue to explore whether additional information can be provided without jeopardizing the effectiveness of these programs. 

The Federal Reserve also is subject to audits by the GAO across 

a wide range of our responsibilities. This year alone, the GAO has 

completed 14 audits of the Federal Reserve’s activities and has an 

additional 14 audits pending. The GAO’s audits have included assessments of our consolidated supervision function, our oversight 

and operation of payment systems, and our implementation and enforcement of consumer protection laws. 

Congress also recently granted the GAO authority to audit the 

emergency credit facilities that the Federal Reserve has provided 

to single and specific companies under Section 13(3) of the Federal 

Reserve Act and clarified the GAO’s authority to audit the Term 

Asset-Backed Securities Loan Facility in conjunction with its review of Treasury’s TARP program. 

However, Congress purposely and for good reason excluded monetary policy matters, including open market and discount window 

operations, from GAO review. Considerable experience shows that 

monetary policy independence, within a framework of legislatively 

established objectives and public accountability, tends to yield a 

monetary policy that best promotes price stability and economic 

growth. 

H.R. 1207 would subject monetary policy matters to GAO audit. 

Financial market participants likely would see this as a substantial 

erosion of the Federal Reserve’s monetary policy independence. 

This would tend to undermine public and investor confidence in 

monetary policy by raising concerns that monetary policy judgments would become subject to political considerations. These concerns likely would increase inflation fears and market interest 

rates and ultimately damage economic stability and job creation. 

The bill would also likely chill the unfettered and wide-ranging 

internal debates that are essential for identifying and implementing the best policy options. 

In addition, enactment of the bill could reduce the effectiveness 

of our discount window and liquidity programs by increasing potential borrowers’ fear of stigma or adverse reactions from participating in these programs. 

We recognize that there may be ways to further enhance the review of the operational integrity of our market credit facilities 

without endangering the Federal Reserve’s monetary policy independence. We will continue to explore ways to improve our transparency and will continue to work with this committee and Congress to ensure that our credit facilities are operated in a way that 

14 

promotes the highest standards of accountability, stewardship, and 

policy effectiveness. 

Thank you, and I look forward to any questions you may have. 

[The prepared statement of Mr. Alvarez can be found on page 60 

of the appendix.] 

The CHAIRMAN. Thank you, Mr. Alvarez. 

First, I do want to note, there was some reference to the recent 

announcement by the Federal Reserve that it plans to put out rules 

regarding the compensation of executives. And I want to make it 

clear, the majority in the House surely welcomes that, because the 

majority in the House voted just before we recessed for the summer 

to direct bank regulatory and financial regulatory agencies, including the SEC, to do exactly what you are proposing. So there is a 

great complementarity here. 

In fact, some people raised the question, when the Federal Reserve made that statement, that it might not have the statutory 

authority. In fact, the bill that we passed in August through the 

House anticipates that and would clearly confer that statutory authority. And I am confident that is going to be part of what we ultimately do in the regulatory reform package. 

And, in addition, one of the other concerns was, well, if the Federal Reserve does it, it covers only those institutions which it regulates; what about the others? Once again, the bill that we did anticipates that argument because it would provide uniformity. And 

I would hope, because I expect that bill to become law, that we 

would then see and we will encourage and maybe require the regulatory agencies of jurisdiction to come together so they have common rules. 

I do want to say that this is a case of the Federal Reserve, I believe, responding to an important national view and, in particular, 

to an action that this House already voted for by a majority in August. 

Now, the question of independence has come up, and people have 

talked about it, and there has been a lot of concern about 13(3) and 

independence. And I think we ought to acknowledge this. When the 

Federal Reserve decided to exercise its authority in 2008 under 

Section 13(3), and the first major intervention, as I recall, was AIG, 

but also, I guess, Bear Stearns—Bear Stearns and AIG—were 

there consultations with the Bush Administration? Did you do that 

over their objection, at their direction, with their concurrence? How 

would you describe the conversations between the other Bush Administration officials—of course, Mr. Bush appointed Mr. Bernanke 

initially—but how would you describe the relationship between the 

Bush Administration and the Federal Reserve with regard to those 

uses of 13(3), which began this regime of greater use of 13(3) by 

a significant amount? 

Mr. ALVAREZ. Well, Mr. Chairman, we had quite a few consultations with Secretary Paulson, the Secretary of the Treasury at the 

time. And we used our authority, with the full support of the 

Treasury and the Administration, in the various aspects of the crisis. 

The CHAIRMAN. No, I think that is important to get in the record, 

probably because people have said, ‘‘Well, you are talking about an 

independence that you don’t have.’’ What would you say to the arVerDate Nov 24 2008 17:39 Apr 09, 2010 Jkt 054871 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\54871.TXT TERRIE
15 

gument, well, you did this—and I acknowledge that seems to me 

to have been the case, that you took these extraordinary steps 

using 13(3), with the full support of the Bush Administration, 

maybe even they were urging in some ways. Did you feel that compromised your independence? 

Mr. ALVAREZ. The discussion about independence is focused on 

our monetary policy actions. The 13(3) authority that we exercised 

for Bear Stearns and AIG, for even Citigroup and then Bank of 

America, those exercises of authority, we think, are appropriately 

done in full consultation— 

The CHAIRMAN. All right. Well, that is a very important distinction to be made. And so, obviously, there will be no problem at all 

and no resistance. Although, obviously, this is going to be written 

here and not at the Federal Reserve, this bill. But there is no resistance to full audit of the use of the 13(3) policy. You say this 

invigoration of Section 13(3), the power to make all these loans, 

came with the full support of and in coordination with the Bush 

Administration. 

Mr. ALVAREZ. And that is right, sir. We do not object to GAO audits of those single and specific— 

The CHAIRMAN. Now, on the window and open market, etc., let 

me make a distinction. I do believe it is important that there be 

a time lag before information is released about who bought what 

and who went where so that this does not become information on 

which people act in the market. 

I would say, however, that is different from saying that, after a 

suitable time period, so that there won’t be this market effect, you 

don’t have a right to go to a Federal agency, borrow money, and 

keep it secret forever. So I do think, with regard to this—I also 

would say, by the way, most people figured out who was in trouble 

and who wasn’t, even without that. 

But could we maintain that distinction—that is, a time period so 

that we maintain market integrity but not ultimate secrecy about 

who benefited from this? 

Mr. ALVAREZ. You are raising a question, I think— 

The CHAIRMAN. Is that a distinction? 

Mr. ALVAREZ. That is— 

The CHAIRMAN. Whether you approve of it or not, is that something that we could work out statutorily? 

Mr. ALVAREZ. That is something that we are giving serious consideration to, and we would be happy to work with you on it. 

The CHAIRMAN. I will be asking you to help us put that concept 

into statute. 

Mr. Bachus? 

Mr. BACHUS. Thank you, Mr. Chairman. 

Mr. Chairman, before I yield the balance of my time to Dr. Paul, 

I do want to point out that in July, the Republican Party, or the 

Republican conference, introduced and members of the Financial 

Services Republican membership introduced H.R. 3310. Within 

that bill is actually Mr. Paul’s legislation in its entirety. 

The chairman had, I think rightly, suggested that any reform 

proposal ought to include an audit of the Federal Reserve and also 

mention Section 13(3). That also, although it is not in Dr. Paul’s 

bill, it is in the Republican alternative; we do limit Section 13(3). 

16 

So, for the record, I would like to introduce the provisions of H.R. 

3310 and the Republican— 

The CHAIRMAN. Without objection, it is so ordered. 

And would the gentleman yield to me for 10 seconds? 

Mr. BACHUS. Yes. 

The CHAIRMAN. Yes, I appreciate that. I do think that is further 

argument for doing this comprehensively. 

Mr. BACHUS. Yes. 

The CHAIRMAN. I simply meant that is, I think, part of the overall approach. 

Mr. BACHUS. And I was just responding to—there was some mention that 13(3) was not addressed. And, in fact, we do address— 

The CHAIRMAN. Only in this particular bill. 

Mr. BACHUS. Yes, but we do, in the Republican alternative, we 

do strike that. 

And, in fact, I would invite anyone interested in, again, looking 

at our Republican plan for reforming the financial regulatory system. Number four, which we devote quite a bit of time to, is fundamental reform of the Federal Reserve. And I would like to introduce that also. 

The CHAIRMAN. Without objection, it is so ordered. 

Let me get general leave now for any member to introduce, or 

any witness, any material he or she would like to put in the record. 

Without objection, it is so ordered. 

The gentleman from Texas is now recognized for 2 minutes and 

50 seconds. 

Dr. PAUL. Thank you. 

Mr. Alvarez, on your first page, you mention— 

The CHAIRMAN. Let me ask the gentleman to yield. If the gentleman would like, there is 2 minutes and 50 seconds left from the 

ranking member, and if he wants his own 5 minutes, you can just 

do the 7:50 right now, if you would like. 

Dr. PAUL. I think I will take the 21⁄2 now and see how things go. 

The CHAIRMAN. Put it back to 2:50. 

Dr. PAUL. Thank you. 

You mentioned, which has been mentioned quite frequently already, about the independence of the Fed. But, on the bottom of 

that first page, you talk about the public interest. You imply that 

the independence of the Fed is important to protect the private interest. 

And I would like to challenge you on that, because public interest 

is not easily definable. And I would suggest that maybe we have 

something to do with protecting the public interest too, maybe that 

is what we are elected for. And I wouldn’t brag about our ability 

and our record, but I still believe that we have tremendous responsibility to protect the public. 

And this idea that a group of individuals, 12 individuals, who 

work behind the scenes who want more secrecy and less transparency, how did this come about where you assume that you are 

in charge of the public interest? Could you explain that to me? 

Mr. ALVAREZ. Congressman, I don’t think we are saying that we 

are in charge of the public interest in a way that excludes Congress 

or anyone else. All government agencies have to act and do their 

17 

best to act in the public interest, as within the constraints that 

Congress has set out. 

The concern that we have is that monetary policy, to be effective, 

has to be—and this is a matter that has been studied in a variety 

of contexts across a variety of schemes in the world—in order to 

be most effective, has to be as free as possible from political considerations. 

The GAO audits, as Congressman Watt and others have pointed 

out, are not audits in the sense that a CPA or an accountant would 

conduct an audit. They are really policy reviews. They are reviews 

that involve, oftentimes, conducting interviews or depositions of 

participants, looking at records, coming to an independent policy 

judgment, and publishing that policy judgment. 

And we are concerned that would undermine the ability of the 

markets to understand the Federal Reserve’s action, the policy actions, to believe that those actions are independent and not being 

influenced by the GAO and that Congress is not trying through the 

GAO to direct monetary policy. That would make our ability to implement the policy, carry out the duties Congress has given us, 

that much more difficult. 

Dr. PAUL. I only have a few seconds left, but if you could answer 

rather quickly, you don’t want us to review the monetary policy because it might be damaging, but exactly what information is it that 

you don’t want us to have? That is what a lot of people ask, and 

they want to know exactly what it is. 

I am sorry, but I guess my time— 

The CHAIRMAN. Well, you can borrow from any future time. 

Dr. PAUL. Okay. 

The CHAIRMAN. I think we will lend the gentleman the time. 

Okay, let him answer it. 

Mr. ALVAREZ. We provide substantial information to the Congress to allow it to oversee our facilities, information about the collateral, about the terms and conditions, about the types— 

The CHAIRMAN. Mr. Alvarez, I want to move this along. The 

question was, what are the types, obviously not the specific information, but what types of information do you think would be damaging if they were revealed? 

Mr. ALVAREZ. Our concern about the audits of monetary policy 

are about the involvement of GAO. It is not about the types— 

The CHAIRMAN. No, Mr. Alvarez, that is not—the question is, are 

there types of information about monetary policy that you think 

would be damaging to reveal? 

Mr. ALVAREZ. No. I think the issue is about the GAO’s involvement in the second-guessing about monetary policy. It is about 

their conclusions and about their review. It is not about the types 

of information. They have made a lot of that information available 

already to the public. 

The CHAIRMAN. All right. I think that is an adequate answer to 

the gentleman’s question. 

Dr. PAUL. Yes, and we can go on. 

The CHAIRMAN. Yes. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. I would just add to that 

from the discussion I have had with the Fed, it has to do with the 

ability of people to sit in the room and discuss something without 

18 

having it appear the next day or being second-guessed the next day 

also. Let me do a couple of things in the minutes that I have. Mr. 

Paul has a devoted follower either in or near my congressional district named Brian D’Amico who regularly calls me about this. And 

one of the questions he has asked me about is the question that 

Mr. Castle raised in his opening statement. I just wanted—and I 

am not a high tech person, so I am going to do this at some risk. 

There is a Web site in which all of these reports about the various funds that the Fed has been administering under the emergency authority dealt with in some detail on Pages 1 through 3 on 

this report, on pages 16 through 22 of the report that I put in 

under unanimous consent. But that information is also available on 

the Fed’s Web site, http://www.FederalReserve.gov/monetarypolicy/ 

bst—Fedfinancial.htm. I probably got something wrong there. But 

for Mr. D’Amico, Mr. Castle, the world out there, please go and 

look at what is already up on the Web site before we continue to 

second-guess what we ought to be demanding that they put up. 

Second, I am delighted to hear the emerging consensus on both 

sides of the aisle that this ought to be done as part of reg form. 

Dr. Paul and I had that discussion a number of times and I feel 

strongly that to do this before we know what the ultimate authority of the Fed will be under regulatory restructuring is just an invitation to go back and have to do it again at some subsequent point 

and we ought to do it as part of the reg reform process. 

Finally, Mr. Alvarez, you are the General Counsel, so I think you 

would be in probably as good a position—you started to address 

this issue in your response to Mr. Paul. I addressed it generally in 

my opening statement, the difference between a regular CPA audit 

in the public context and the definition or coverage of a GAO audit 

as we think of it in the government context. I presume a GAO 

audit is not just a report of the numbers. Talk to us about what 

a GAO audit authorizes the GAO to do. 

Mr. ALVAREZ. Thank you very much, Congressman. You are exactly right, our financial statements are audited by an actual accounting firm in the traditional sense of audit that people think 

about, checking the numbers and making sure they are accurate. 

And that we make public on an annual basis. The GAO looks at 

discreet areas or broad areas. It has access to all the information 

of the Agency and then it formulates suggestions on how the Agency should develop policy. It may make suggestions about the very 

policy itself, and provide that information to the Agency. It is not 

directed at just verifying what has occurred or verifying the accuracy of statements. It really is meant to be more a policy guide for 

the agencies. So it does involve itself in making recommendations 

about policy decisions. 

Mr. WATT. I take it if we did—if we didn’t clarify this or be more 

specific about it, we might—Mr. Paul might, 5 years from now, be 

requesting a GAO audit of the GAO in his comments because it has 

pretty broad authority to get into policy decisions, things that are 

not just numbers crunching. That is the point you are making? 

Mr. ALVAREZ. That is exactly right. 

The CHAIRMAN. We have one maybe 15-minute vote, so we are 

going to break right now. There is a possible second vote. The gentleman from Texas and I do not plan to stick around for the inVerDate Nov 24 2008 17:39 Apr 09, 2010 Jkt 054871 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\54871.TXT TERRIE
19 

struction motion vote over there. So we are going to go vote on the 

rule and come right back and continue this because of the importance for the day. So we are in recess, but not for more than 10 

or 15 minutes, as long as it will take Mr. Paul and I to go over 

and vote and come right back. 

[recess] 

The CHAIRMAN. The hearing will be convened and the gentleman 

from Texas is recognized for 5 minutes. 

Mr. NEUGEBAUER. Mr. Alvarez, in your testimony—and you 

made this point several times, you said we want the American people to have as much information about what we are doing that— 

to the extent that it doesn’t jeopardize the performance of our duties. And here is the question I have: If I go to the doctor and the 

doctor says I am going to review your test, he reviews my test and 

he says I am going to tell you everything I think you need to know, 

I am just not going to tell you everything I know. I immediately 

become interested in what he is not telling me than more interested in what he is telling me. What are those things that would 

keep you from being able to do your duties that you shouldn’t tell 

us? 

Mr. ALVAREZ. Very good question, Congressman. I think this is 

more akin to what should your doctor tell the public about your 

health, not about what the doctor should tell you. I think our concern is not about hiding information; it is about maintaining the 

integrity of the process for making monetary policy. Monetary policy involves, as does congressional policy development in other 

areas, a lot of discussion and debate about ideas that may work, 

ideas that won’t work, about data that may be meaningful, data 

that may not be meaningful. It requires an unfettered and broad 

discussion. That discussion—that process is what we seek to make 

sure is effective. Also, monetary policy depends very much on the 

market’s understanding of whether the Federal Reserve will move 

in a particular direction, how it will move in a direction, whether 

it will stay in that direction and when it will change directions. 

If it looks like the Federal Reserve is changing directions because 

a statement, a policy review by another agency is influencing the 

Federal Reserve’s decision not because the Federal Reserve is moving based on data, but is, in fact, responding to a GAO policy recommendation, then the integrity of the process will be undermined, 

confidence that the Federal Reserve will move in the direction that 

is best for the economy will be undermined and we won’t be able 

to carry out our job as well. That is what we are concerned about. 

Mr. NEUGEBAUER. I think one of the things that the American 

people are concerned about is that, one, you have grown your balance sheet to over $2 trillion and that ultimately they are on the 

hook for the activities of the Federal Reserve. The other piece is 

the Treasury recently has made a recommendation that now we 

make the—take additional responsibilities, additional authority, 

even more broad authority than maybe some of the authority you 

already have to be the systemic risk regulator. And yet we have the 

Fed coming to us and saying, yes, we aren’t going to have full disclosure, we are going to take on these responsibilities. And I think 

they are concerned about that. Think about, for example, the currency swaps and international currency transactions that the Fed 

20 

is engaged in, and we don’t know all of the details of those transactions. Are we requiring these countries actually to turn around 

and buy treasuries with some of these facilities in a way to prop 

up our unfettered spending in this country where we are spending 

a dollar and borrowing 50 cents for every dollar we spend. 

The American people are extremely—I don’t know if you all are 

listening over there or not, but the American people are extremely 

concerned about the activities that are going on in government and 

also they lump you—whether you want to be independent or not, 

you are lumped in as part of government. So I think you all are 

going to have to do a better job of articulating. Because when you 

look at the—for example, when some of these financial institutions 

started participating in some of these credit facilities, it actually 

brought confidence to the market. 

And so the fact that a large bank is now coming to the Federal 

Reserve window and you are completing that transaction should 

give the market more confidence that the financial institution possibly is in good condition. Or if you were turning them away, it 

might have a greater impact. I am having a hard time understanding the transparency argument. 

Mr. ALVAREZ. Congressman, if I could respond briefly to several 

of those points. First of all, on the foreign currency swaps, we provide very detailed information about those swaps on our balance 

sheet and in the monthly report that Congressman Watt referenced. For example, we list the countries that we have the swaps 

with. We list the amount outstanding. We list the terms and conditions of those swaps so that the public will understand what the 

exposure is of the Federal Reserve. That is all explained in our 

monthly reports. As the amount drawn in those swaps change, we 

revise that information to make it available to the public. So that 

kind of information is precisely what we have tried to put together 

on the Web site. Also you reference the size of our balance sheet, 

$2 trillion. Most of that is in the form of U.S. Government—ownership of U.S. Government securities and agency guaranteed securities. That, again, is listed in detail on our balance sheet with the 

maturities of those securities and a lot of other detailed information that should help give people confidence if they are able to 

spend the time to look through the information. With a complicated 

balance sheet, it can’t be summed up in a couple of words, which 

makes it more difficult for us. That is why we put so much information on the Web site and in the monthly report. 

Mr. WATT. [presiding] The gentleman’s time has expired. The 

gentleman from Kansas, Mr. Moore, is recognized for 5 minutes. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. Mr. Alvarez, 

as we consider improving transparency and oversight of the Fed, 

I would like to better understand what risk U.S. taxpayers take on 

when the Federal Reserve lends money, especially under the authority granted the Fed via its 13.3 emergency powers. What collateral, if any, does the Fed require to protect against the risk of 

losses when extending credit and has the Federal Reserve lost 

money on its lending activity? Do you expect the Federal Reserve 

to lose money on any of its lending activity since the financial crisis 

last year, Mr. Alvarez? 

21 

Mr. ALVAREZ. Congressman, as you pointed out, the lending that 

we do under Section 13.3 is secured. So we have collateral against 

that lending and we believe and our advisors who are monitoring 

these things and valuing the collateral on a regular basis continue 

to believe that we have very little exposure here and we expect to 

be fully repaid on the loans that we have made. The types of collateral that are supporting those lendings is described in the monthly 

report that we have. It varies by facility. Some facilities are backed 

by residential mortgage backed securities. Some are backed by 

other kinds of loans, agency security, a variety of things. But we 

explain that in the monthly report for each of the facilities. 

Mr. MOORE OF KANSAS. Thank you, sir. As we consider improving the transparency of the Federal Reserve, I understand more 

than 385 prominent economists have signed a petition warning, 

‘‘the independence of U.S. monetary policy is at risk,’’ because of efforts to audit the Federal Reserve’s monetary policy activity. How 

would you respond to those economists? 

Mr. ALVAREZ. We believe that monetary policy must be done in 

an independent manner and believe that it is most effective when 

the Federal Reserve is able to have its unfettered debate and issue 

its policy decisions without second-guessing, without competing interests in communicating those policies to the public. So, in general, we agree. 

Mr. MOORE OF KANSAS. And finally, Mr. Alvarez, if H.R. 1207 

was signed into law by the President today, what effect might that 

have on the economy and financial stability, sir? 

Mr. ALVAREZ. If the bill were passed today, the GAO would be 

required to do an audit immediately of our monetary policy positions. We are concerned that would, as I mentioned in the testimony, cause the markets and the public to lose confidence in the 

independence of the judgments of the Federal Reserve, there would 

be confusion about the communication about the forward actions of 

monetary policy, the forward path of monetary policy, and we are 

concerned that would make our ability to implement policy that 

would reach maximum employment and price stability much more 

difficult, leading potentially to higher interest rates before that is 

appropriate and in fact higher interest rates as a general matter. 

Mr. MOORE OF KANSAS. Thank you, sir. Mr. Chairman, I yield 

back. 

Mr. WATT. I thank the gentleman. Mr. Castle from Delaware is 

recognized for 5 minutes. 

Mr. CASTLE. Thank you, Mr. Watt, Mr. Chairman. Just in reference to something you said earlier about a number—I and a couple of the others here mentioned information that we wanted. You 

indicated some of the information from the Federal Reserve is on 

their Web site, which may be accurate. But maybe I didn’t articulate it very well. We are really trying to derive an independent 

analysis of what their information is, is what we are after. But to 

Mr. Alvarez, you mentioned a couple of things, and I tried to find 

it in your written testimony and I couldn’t, so I don’t have it exactly. I may be not summarizing quite correctly. Correct me if that 

is the case. You indicated something to the effect of you are—you, 

the Federal Reserve, are looking at additional information that you 

could consider releasing without jeopardizing your programs, those 

22 

are my words and then later on you indicate in your testimony you 

are exploring ways to continue transparency or something to that 

effect. That I assume is beyond anything that has been done so far. 

Without going into any of the confidentialities of the Federal Reserve, can you share with us more specifically what those discussions consist of and what areas you are looking at and stuff? 

Mr. ALVAREZ. We have, as you have mentioned, increased substantially the amount of information that we make available as we 

have learned there is an appetite for that information. And we continue to take suggestions that come from hearings like this and 

from Congressmen to think of ways that we can be more— 

Mr. CASTLE. Is there any specific you can share with us that you 

are considering at this time beyond what you have already done. 

Mr. ALVAREZ. The chairman has mentioned we are actively considering how much information about borrowers we can make 

available and then we are exploring ways to allow review of the 

operational integrity of our implementation of monetary policy and 

whether that is possible. All areas that are still under thought, 

deep thought. 

Mr. CASTLE. You have heard the concerns of the various members on both sides with respect to everything that the Federal Reserve is doing, not that you don’t do a good job, but the disclosure 

of information, etc. And we are concerned because ultimately any 

losses founded are going to be paid for by the taxpayers. And there 

seems to be some opposition to Dr. Paul’s legislation as I understand it. So my question is, how much congressional oversight in 

the institution is appropriate? Or what aspects of Dr. Paul’s legislation could the Federal Reserve live with if you are qualified to give 

us that response in terms of your knowledge? 

Mr. ALVAREZ. Let me point out that there is congressional oversight of our activity, including our monetary policy. 

Mr. CASTLE. Beyond that which is in the legislation. 

Mr. ALVAREZ. To the extent GAO is a part of that, that is an area 

where I think we would like to continue to work with the Congress. 

We don’t have a specific idea at this point that I am prepared to 

put forward. But we would like to continue a discussion about 

whether there are ways that our implementation of policy or the 

operational integrity of our implementation might be something 

that could be reviewed. 

Mr. CASTLE. I am not an expert on all of your power, but this 

whole 13.3 business seems to be the area where all of this really 

started, it started for Dr. Paul a long time ago, but for a lot of the 

rest of us in terms of some of the lending and things you are doing. 

I would encourage you to continue your discussions of what you are 

willing to do in terms of transparency. I don’t know if this legislation is going to be part of a greater bill or even have a chance for 

passage or whatever. But I think there is a need by the public to 

know this. I think the transparency helps in terms of support of 

your policies and to the dollar and the things that you are concerned about. 

And my hope is that this won’t just go away, that the Federal 

Reserve will continue to look at it very seriously and understand 

that Members of Congress are very concerned about this as well, 

23 

whether legislation passes or not. I yield back the balance of my 

time, Mr. Chairman. 

Mr. WATT. I thank the gentleman. Mr. Sherman from California 

is recognized for 5 minutes. 

Mr. SHERMAN. Nobody in my district thinks that the Fed has 

done such a wonderful job of running the economy that we should 

continue to cloak them in secrecy for the purpose of protecting 

them from second-guessing. Second-guessing, criticism is kind of 

what goes with being in government. Mr. Alvarez, we have talked 

a lot about 13.3. Let us say next year the entire Federal Reserve 

Board comes to you and says, look, Congress won’t pass TARP 2, 

they won’t pass any new legislation, the economy is going to melt 

down, we are going to be eating rat meat in the streets if you don’t 

agree—because you are the General Counsel—that we can use Section 13.3 not just to invest in no risk or virtually no-risk instruments, but to invest in what we think is kind of the equivalent of 

a Single A instrument. Under those circumstances, would you 

agree that 13.3 could be used to make a modest risk investments? 

The equivalent of Single A investments. 

Mr. ALVAREZ. Congressman, we don’t make investments in that 

way. 13.3—under 13.3. 13.3 allows us to lend against collateral. 

Mr. SHERMAN. Many people use the word investment to describe 

a loan, but I will recast my question. To make loans that have the 

same risk as associated with a Single A bond. 

Mr. ALVAREZ. We do lend today against a whole variety of collateral that includes collateral that is a variety of ratings and some 

collateral that is not rated. So we lend against other loans for example that are not rated. 

Mr. SHERMAN. Sir, don’t get tied up in my use of the term Single 

A. I am trying to use that to describe a level of risk. The question 

is, do you have to be absolutely fully secured or will you take the 

kinds of lesser security for which investors usually demand—private investors usually demand, 3, 4, 5 percent above LIBOR? 

Mr. ALVAREZ. We are required by statute to be secured to our 

satisfaction. That is in 13.3. And so I would expect that we would 

be fully secure— 

Mr. SHERMAN. Sir, I am asking you what is legal. 

Mr. ALVAREZ. And I am explaining it. 

Mr. SHERMAN. You are telling me what is the practice. Is it illegal for your Board to make an investment that is not fully secured? 

And, excuse me, to make a loan that is not fully secured under a 

liberal interpretation of Section 13.3. 

Mr. ALVAREZ. It is required by statute that we be secured to the 

satisfaction of the lending reserve bank. The question you are asking is would it be possible for a reserve bank to feel secure without 

having 100 percent collateral. That has never been the case. So— 

Mr. SHERMAN. But you would not tell them that they did something illegal if they had something less than full security? 

Mr. ALVAREZ. The point of being secured is there would be a 

guaranteed repayment. So if there were other ways to guarantee 

repayment for example, sometimes credit is guaranteed by a third 

party. Sometimes— 

Mr. SHERMAN. Looking at the entire investment, there are many 

credit enhancements for investment. There is security and guaranVerDate Nov 24 2008 17:39 Apr 09, 2010 Jkt 054871 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\54871.TXT TERRIE
24 

tees. And the market has a way of looking at the entire package. 

There are some loans that are LIBOR, there are some that are 

LIBOR plus 8. The language of finance allows me no words to describe except what a private investor would demand. I am asking 

you, would a significantly less than the kind of security that 

LIBOR or LIBOR plus 1 loans are made be legal under 13.3? And 

I am asking for a yes or no answer rather than a description of 

what you think they would do. 

Mr. ALVAREZ. It is not easy to give a yes or no answer to that 

question. That is a very nuanced question. 

Mr. SHERMAN. What you are saying is you might very well allow 

them to do the equivalent to buy a trillion dollars worth of junk 

bonds if they thought that was adequate security under the circumstances? 

Mr. ALVAREZ. If they thought they would be fully repaid by the 

loan in the loan that they made and it was secured, then, yes that 

would be the right answer. 

Mr. SHERMAN. Sir, when you invest—we deal with probabilities 

in finance. People who buy junk bonds expect to be repaid but they 

expect there is a risk. And you are saying that if they expect with 

a 51 per chance of being repaid— 

Mr. ALVAREZ. No, I am not. As we pointed out, this isn’t about 

investing. It is about lending. So you have to be in a position to 

be fully repaid. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from Texas, Mr. Paul. 

Dr. PAUL. Thank you, Mr. Chairman. I am going to make a few 

comments. I am not going to ask specific questions. I would like to 

submit my questions in writing and then have a follow-up on that. 

But just a few comments. I wanted to talk about something you 

wrote on page 6 that said monetary policy independence prevents 

governments from succumbing to the temptation to use the Central 

Bank to fund budget deficits. 

I think we are already there and that is one of my big contentions about what is happening is that we have had license to 

spend. We borrowed and we don’t have enough and then the Federal Reserve has been politicized to the point where they do accommodate us, whether it is for the funding of wars or for the welfare 

state, and that is why I think we have to eventually get to the bottom of this. 

The Federal Reserve was designed and their mandate was to 

make sure we have full employment, price stability and stable interest rates. In my lifetime, interest rates have been 21 percent 

and less than 1 percent. So they failed there. A stable dollar and 

stable prices, well, we have continuous inflation. We have a 4 cent 

dollar that started off as a dollar in 1913. There was total failure 

there and we don’t execute proper oversight. And it is our responsibility, and that is, of course, what I am arguing for. It is supposed 

to have full employment. 

When you look at the free market calculation of unemployment 

and even government statistic unemployment now is 16 to 20 percent and in the Federal Reserve, they are arguing that they have 

to have more secrecy? This doesn’t make any sense whatsoever. 

And more people. People are arguing we give more power to the 

25 

Federal Reserve. What we need is more oversight and more transparency rather than more authority to the Federal Reserve. I mentioned earlier, and I think we still have to continue to think about 

it is: what example have we ever had where the GAO had an influence on policy? 

They are an independent agency of government and they just 

don’t influence policy and I just don’t believe that all of a sudden 

because we have an audit, we, as the Congress, are going to be 

looking over the shoulder. That is not the intent of the bill whatsoever. But I want to just mention very briefly about the foreign activity. You have explicitly said, don’t touch the foreign activity. 

Well, the foreign activity is very important. Those are essentially 

treaties. You have agreements with other governments, other central banks, you commit funds which is indirect taxation because 

you don’t tax the people for it, you print the money and you make 

these deals and promises to interfere in markets. You are involved 

in the President’s Working Group on Financial Markets. This we 

all must find out about. We have to know about this. This is our 

responsibility because ultimately it leads to what the dollar is 

worth. The Federal Reserve, if anything, they should be protecting 

the value of the dollar, not deliberately destroying the value of the 

dollar. These are essentially treaties. The same way—when you 

create money out of thin air to subsidize something or bail somebody out, you have assumed the authorization and the appropriation process. 

We are derelict in our duties as Members of Congress to allow 

this to happen. It is a government unto itself. So I am going to follow up. I am going to put this in writing and hopefully I can get 

some answers. And I yield back the balance of my time. 

Mr. WATT. I thank the gentleman. The gentleman from Kansas 

City, Mr. Cleaver. 

Mr. CLEAVER. Thank you, Mr. Chairman. I think Dr. Paul is obviously very well informed on this issue, maybe better than anyone 

else in Congress. But I recently had lunch with the Chair of the 

Kansas City Fed and we had a great—an interesting conversation. 

And I asked him as we sat in the dining room looking out at window, I said how many of the people do you think walking by here 

can make two sentences about what the Fed does. And he said 

none, which was the correct answer. One of the problems I think 

we have, and I am not sure that the Fed can solve it, is most people have no idea what the Fed does. In our system of government, 

that is always going to create problems. 

Now, I am not interested in defending the Fed. I will a little in 

just a minute. But when things happen like the bank bailout, that 

sours the opinions of the public and Congress because, sir, Mr. Alvarez, most people and probably most of them sitting behind you 

and most of them in my district believe that Congress took a specific vote to give money to the banks when, as you know, that did 

not happen. And so the transparency was missing. And I go home 

and people say, you guys voted to give the money to the banks, and 

when you say, we never took that vote, then the next question is, 

well, how did they get the money if you guys didn’t vote to give it? 

And so I want you to explain to some of the folk in Kansas City 

and Independence how the banks got the money if this committee 

26 

never recommended to the full House and then the Senate and 

then conference and then the President’s signature. 

Mr. ALVAREZ. I believe, Congressman, you are speaking about 

the Troubled Asset Program, the TARP program. 

Mr. CLEAVER. Yes, the Toxic Asset Removal Program. We were 

going to remove the toxic assets from the market so that people 

would have a greater deal of comfort in becoming actively again involved in the assets. We did not do what the Swedes did, which 

took—well, they took the assets, put them—separated them in 

what we call around here the bad bank. We didn’t do that. But we 

did bail out the banks. At least that is what the public believes. 

Mr. ALVAREZ. Of course, the Treasury is in a better position than 

I am to discuss that program. But in summary— 

Mr. CLEAVER. The Fed was involved. 

Mr. ALVAREZ. In summary, I think the expectation was that 

fund, those funds would be used to buy troubled assets. It became 

clear in October of 2007—or 2008 that it would take quite a long 

time to work through the details of an asset purchase program that 

would be effective, in fact Treasury and the FDIC continue to work 

on those details now. This is more than a year later. But it also 

became clear in October that the events of last fall, the economy 

was struggling tremendously. There were very many troubled institutions and confidence in the banking system needed to be restored. So Treasury took the decision that it was most effective and 

most necessary to use the funds there to inject capital into the 

banking system to restore confidence in the banking system. 

Now, the Treasury did that not by giving money away and I 

think that is an important point to make. It was investing the 

money in banking institutions and is that money being repaid. Repaid with profits and repaid with interest. 

Mr. CLEAVER. Let me stop you there because I am going to turn 

on you. One of the problems is that the people don’t know anything 

about what the Fed does. So hopefully, some of that can be laid 

out. Don’t the funds that you earn return to the U.S. Treasury? 

Mr. ALVAREZ. Absolutely, sir. All the excess funds we earn beyond expenses are given over to the Treasury for use in dealing 

with the debt. 

Mr. CLEAVER. Purchases, liquidity, loans? 

Mr. ALVAREZ. The interest on the loans we make. The interests 

we get on our assets. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from New Jersey, Mr. Garrett. I apologize for cutting people off, 

but we are going to have votes and I am trying to get as many people in. 

Mr. GARRETT. Thank you, Mr. Alvarez, for being here and for 

your testimony. So what I have actually learned here today here 

is that as we focus on this legislation in general, we can sort of 

break it down into two parts, the monetary policy issues that the 

Fed does and sort of like everything else. And then the everything 

else area, it sounds as though from the questions answered so far 

is that you have worked with the Administration, the Bush Administration and this Administration and some of those programs and 

you have appreciated the—working together on that and with some 

of the other policies, what have you. 

27 

It seems as though the Fed has—I will use the word ‘‘responded’’ 

to some of the suggestions, or what have you, in these other areas 

to try to change their ways. For example, all the information on the 

Web sites and the audits and stuff like that is out there. And that 

is, as far as I am hearing, is an okay thing. 

And so the other—Chairman Frank—of course, that is with pressure if you will and encouragement to the Fed with regard to credit 

lending practices and that sort of thing and other people have as 

well. And the Fed might say has responded and the Fed has been 

active now in those areas as well, coming up with new guidelines 

on credit cards that sort of thing. So in that area, it looks as 

though the Fed is a little bit open to the idea of hearing what Congress has to say and respond. So it is really in the monetary policy 

area that this legislation is most concerned or troublesome if that 

is the right word. So one aspect of it is the disclosure requirements. 

What happens if the information is released too soon and what 

have you and you have your guidelines as to when currently you 

are released. 

But as I just re-read it as I sit here, the audit doesn’t really say 

that if you have a meeting on Monday and they do the audit on 

Tuesday and, of course, it is going to take longer than that, that 

they are going to release all that information. It sounds like the 

audit is going to be one of these things is going to take forever to 

do and finally release it. So it is not like you are going to have that 

immediate release of information that you are concerned about, at 

least from this audit; is that correct? 

Mr. ALVAREZ. GAO is very responsive to the requests of Congress 

when Congress asks for audits in a specific period of time. My experience has been GAO tries its best to be responsive. So the timeframes would be—depend on what the audit is and what the— 

Mr. GARRETT. In other words, your concern is you have a meeting on Monday—right now you release your minutes or what have 

you in 2 or 3 weeks. So unless the audit is done in a lesser period 

of time—would that be a provision that you would like to say that 

if we change the language and say that it has to be a few weeks 

after— 

Mr. ALVAREZ. It is not just about the timing. It is— 

Mr. GARRETT. From that one point, would that solve it? 

Mr. ALVAREZ. I don’t think so because the timing of the release 

of the audit—let us think of it this way: There are two parts to it. 

The audit itself would involve an intrusion into the process of making monetary policy by the GAO’s involvement with the various 

members and looking at the discussions and then second-guessing 

those discussions in its report. Its report, whenever it comes out, 

is going to be a judgment about whether the Fed is doing the right 

thing, moving in the right direction on monetary policy, whether its 

basis for that— 

Mr. GARRETT. Doesn’t Congress already have the authority with 

all the reports and everything else and the chairman comes and 

testifies a couple of times a year? We have that authority right now 

to, if you will, second-guess what the Fed is doing? Don’t we have 

that authority and the responsibility to second-guess Congress— 

second- guess the Fed at this point? 

28 

Mr. ALVAREZ. I think what is different is the GAO establishes a 

much more intrusive reviewing process. It, as I mentioned, it will 

talk to all of the participants. It will look at all of the underlying 

data and make a more comprehensive evaluation. 

Mr. GARRETT. So what you are saying— 

Mr. ALVAREZ. The statement at the end. So that review gives it 

a different aura in its report, a different kind of weight. 

Mr. GARRETT. What that is basically saying is we can secondguess and give you our opinion just as long as we don’t know what 

all the facts are; but if somebody else actually goes in and talks to 

the people and finds out what the facts are, then that report would 

have more weight because they were actually there. It sounds as 

though when we second-guess you, we are basing it on inadequate 

information and when the GAO does their inquiry, they are doing 

it with—last question. 

I only have 30 seconds. If the Governors are as independent as 

they hold themselves out to be, why would they be so subjected 

then to this pressure from someone second-guessing them and saying that we think you should have done ‘‘X’’ when they did ‘‘Y?’’ Are 

they like what Secretary Geithner says as far as all the other regulators? He says all the other regulators, banking regulators—I 

know you are not a regulator per se—but all the other banking regulators are only looking out for their own turf and their own selfinterest and he doesn’t hold regulators up very high. 

Is that the case with the Federal Governors or are they truly 

people who are independent and would not be subjected to the 

pressures of an audit, whatever the audit says? What camp do they 

fall into? 

Mr. ALVAREZ. They do their best right now in the atmosphere 

they are given, they are given an atmosphere where unfettered discussion is allowed and is actually valued. They would become much 

more worried about how their remarks would be viewed, what their 

thoughts would be and become much more careful about what they 

say. And that changes the debate, that changes the discussion, lowers the level of interaction. 

Mr. GARRETT. I understand what you are saying. 

Mr. WATT. The gentleman’s time has expired. The gentleman 

from Illinois, Mr. Foster. 

Mr. FOSTER. Thank you. I have just one question having to do 

with historical archiving of information. I can understand your motivation to not want deliberations, discussions with foreign regulator, this sort of thing. To become immediately part of the public 

debate and so on, I understand that line of reasoning. However, I 

think there is a real incentive and a good policy objective in having 

the eyes of history on the decisions that are being made. 

So for example, do you have policies on archiving correspondence, 

memos, e-mail and policy on the dates of which different classes of 

information get released? 

Mr. ALVAREZ. We do, sir. The decision is announced immediately 

after the meeting, detailed minutes are made publicly available. 

Mr. FOSTER. I wasn’t referring to just the official meetings where 

decisions take place. I am talking about e-mail between two people 

who are kicking back and forth saying, I just met with this EuroVerDate Nov 24 2008 17:39 Apr 09, 2010 Jkt 054871 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\54871.TXT TERRIE
29 

pean guy, he said that we are going to terminate this program 

then, it would be really good if we coordinated. That sort of— 

Mr. ALVAREZ. We do. We have policies for all of the documentation, including e-mails that we keep for the length of time that 

we—we have a schedule that is in accord with the archivist about 

keeping that information. Also in the monetary policy area, we 

keep all the memoranda that are used for the FOMC meetings and 

a complete transcript of the meeting. We make those available to 

the public after 5 years. And we keep them permanently ourselves. 

Mr. FOSTER. But the—for example, all the detailed stuff, e-mails, 

internal memorandums, person-to-person correspondences, will 

those be available to historians 10, 20, 30 years from now? What 

is the policy there? 

Mr. ALVAREZ. The policy of the disclosure of that information depends on the type of information. Some is made available as time 

passes. Some of it contains confidential information that is not 

made available even as time passes. So it depends on the type of 

information. But as I mentioned on FOMC matters directly, the full 

transcript and all the supporting memoranda for the decision, so 

that includes the complete discussion. 

Mr. FOSTER. It is the less formal—is any information deliberately 

destroyed or is it simply kept but not released? 

Mr. ALVAREZ. The only information that is destroyed is information that the archivist, the national archivist has agreed, can be destroyed and that is usually information that has no historical value 

and that is destroyed according to a set schedule and that is to 

allow capacity for new information. 

Mr. FOSTER. Would it be possible for you to point us at the policies the archivist follows, in some appropriate level of detail so we 

can see the classes of stuff that is preserved and destroyed and the 

sort of general guidelines that are being followed? 

Mr. ALVAREZ. Yes, sir. 

Mr. FOSTER. Thank you. I yield back. 

The CHAIRMAN. The gentlewoman from Minnesota. 

Mrs. BACHMANN. Thank you, Mr. Chairman. Thank you, Mr. Alvarez, for being here. I wondered if you could give us an update 

on the status of the Fed’s appeal of the ruling in the Bloomberg 

Freedom of Information request lawsuit requiring the Fed to disclose the identity of the firms that accessed the discount window? 

Mr. ALVAREZ. Yes. As you are aware, Congresswoman, there are 

two cases. There is the Bloomberg case and the Fox News case, 

both decided by district judges in the second circuit about 3 weeks 

apart on identical issues, one saying that the information should be 

released, one saying information should not be released. Both cases 

are in the process of being appealed to the second circuit. The appeals, the appeals are due in the next few weeks, and I expect 

them to be both fully appealed. 

Mrs. BACHMANN. And you had said that prospective discount 

window borrowers would be discouraged from using the facility if 

their identities were to be disclosed. But a recent Wall Street Journal article described how the sheer prices of Citigroup and E-Trade 

Financial Corporation actually increased after the public learned 

that they received government support. So I am wondering how 

those circumstances would differ. 

30 

Mr. ALVAREZ. I think the concern on many of the facilities is that 

they are used by healthy institutions to try to unfreeze some of the 

markets. So for example, our commercial paper funding facility, the 

borrowers in that facility are not troubled institutions. They are institutions that are trying to restart the market for commercial 

paper, the same with our TALF facility where we are trying to restart the market for student loans, for auto loans, for small business loans, for credit card loans. And the investors and the borrowers in those markets are regular market players. They are not 

troubled institutions. The concern is that borrowers in those facilities, if their names were disclosed, would be viewed by the public 

incorrectly as institutions that are troubled because we have also 

lent in other ways to troubled institutions. We have lent to Bear 

Stearns and we did do the AIG loan. Clearly troubled institutions. 

And so because we do help troubled institutions and those that 

are not troubled, the concern of those that are not troubled is that 

they will be lumped in with the troubled ones and that is the reason—it is—market prices would not necessarily go up. Market stigma would, in fact, happen. 

Mrs. BACHMANN. Section 13.3 of the Enabling Act and the powers with the Federal Reserve, there has been some disagreement 

from individuals on whether or not this was the first time that the 

Fed had opened the discount window to a private investment bank 

when it opened it up to Bear Stearns. Was that the first time, or 

did they open it up prior in the late 1980’s? 

Mr. ALVAREZ. The Federal Reserve opened 13.3 during the 

1930’s, but not to—not to investment banks in the 1930’s. 

Mrs. BACHMANN. In the 1980’s, in the mid 1980’s, there— 

Mr. ALVAREZ. It never opened the window in the 1980’s to anyone. The next time that it made the 13.3 available was actually the 

1960’s, but that was all to thrift institutions. It didn’t actually use 

the authority again until right before Bear Stearns with the TSLF 

facility and then the Bear Stearns loan. Those were the same week. 

Mrs. BACHMANN. I am sure you understand the concern we have 

as Members of Congress as we looked at the extraordinary actions 

the Federal Reserve took in regard to Bear Stearns and regard to 

the investment banks and then, of course, looking at the TARP. 

And one thing that I have wondered is whether Congress shouldn’t, 

in fact, revisit and tighten up the language of 13.3. When you read 

the language of 13.3, the Federal Reserve seems to have the power 

to do virtually anything it wants to do with no restriction whatsoever. Would that be a prudent thing for Congress, do you think at 

this time, to take up and tighten up, if you will, or maybe pull the 

leash on the Federal Reserve on the actions it could take with the 

taxpayers’ money? 

Mr. ALVAREZ. Two points there. One is I would like to point out 

that the 13.3 lending to specific institutions like Bear Stearns, AIG, 

Citi, and Bank of America, for example, are subject to GAO audit, 

which is just to make sure that is clear. But then whether the Fed 

should continue to have 13.3 authority, our chairman has suggested that if resolution authority were enacted so that we would 

have—the government would have another tool for implementing— 

for passing on the risks to shareholders and creditors and the government wasn’t left with the choice of bailing out or bankruptcy, 

31 

then that would be an atmosphere or a context where some revision to 13.3 may be appropriate. 

The CHAIRMAN. The gentlewoman’s time has expired. The gentleman from—I did pass—I want to make one point. Earlier, the 

gentleman from Georgia talked about hearings. I interpreted that 

as some unhappiness with the record. He assured me that was not 

the case, that he was talking about going forward. But I did check. 

And according to our records, there have been 28 appearances before this committee in hearings by officials of the Federal Reserve, 

the Chairman more than anybody else. But in the last calendar 

year, we have had 28 appearances by officials of the Federal Reserve, the Chairman, other members of the Board of Governors, 

and other officials. The gentleman from Colorado is recognized for 

5 minutes. 

Mr. PERLMUTTER. I need a primer or whatever on the Federal 

Reserve. Remind me how many Federal Reserve banks there are. 

Mr. ALVAREZ. There are 12 Federal Reserve banks. 

Mr. PERLMUTTER. And how many Governors are there per bank? 

Is there one Governor per bank and then a Board? Or how is the 

structure, the decision-making structure set up? 

Mr. ALVAREZ. In Washington, D.C., there is a Board of Governors 

that has seven members. Right now, we only have 5 of those positions filled, but could have 7 members. Each reserve bank has one 

president for the reserve bank and then board of director, this is 

set by Congress, a board of directors of nine members, there are 

three elected by the banks, representing banks, three elected by 

the banks that represent commerce at large and three selected by 

the Board of Governors to represent the public at large. 

Mr. PERLMUTTER. And the Board of Governors, how are they selected? They are selected either by Congress or by the banks or 

how are they selected? 

Mr. ALVAREZ. The Board of Governors in Washington are appointed by the President and confirmed by the Senate, all seven. 

Mr. PERLMUTTER. So there are seven? 

Mr. ALVAREZ. Yes. 

Mr. PERLMUTTER. How are the presidents—who selects a president or how do they become the president of the banks? Kansas 

City, we talked about the Federal Reserve of Kansas City. 

Mr. ALVAREZ. They are selected by the board of directors but approved by the Board of Governors in Washington. 

Mr. PERLMUTTER. I guess what I am trying to understand is 

whether there is a confirmation process in the Senate of all the 

Governors or just some of the Governors? 

Mr. ALVAREZ. All of the Governors in Washington. 

Mr. PERLMUTTER. And then—but there are 12 Governors. There 

are only seven Governors? 

Mr. ALVAREZ. Correct. 

Mr. PERLMUTTER. In all of those—we have two openings right 

now? 

Mr. ALVAREZ. That is right. 

Mr. PERLMUTTER. And their terms are how long? 

Mr. ALVAREZ. 14-year terms and they are staggered to expire 

every 2 years. 

32 

Mr. PERLMUTTER. Remind me again, how are the presidents selected? 

Mr. ALVAREZ. The presidents of the reserve bank are selected by 

the board of directors of the reserve bank but then with the approval of the Board of Governors in Washington. 

Mr. PERLMUTTER. Let us go back to Mrs. Bachmann’s questions 

on 13.3. Explain what it takes to have an action taken in unusual 

and exigent circumstances under 13.3. 

Mr. ALVAREZ. Under 13.3, the Federal Reserve Board may authorize a reserve bank to make a loan if by a vote of at least five 

members of the Board of Governors in Washington, the Board determines that there are unusual and exigent circumstances. They 

direct the reserve bank to make sure it is secured to its satisfaction, and the reserve bank then has to collect evidence that other 

credit accommodations aren’t available to the borrower. In those 

circumstances, the reserve bank can make a loan. 

Mr. PERLMUTTER. Did that occur with the Bear Stearns assistance? 

Mr. ALVAREZ. Yes, it did. 

Mr. PERLMUTTER. I guess I recall the action being taken, which 

I personally felt was very unusual for the Federal Reserve, and it 

is borne out in your testimony that it never happened except 

maybe back in the 1930’s. 

Mr. ALVAREZ. Right. 

Mr. PERLMUTTER. Can you describe the process that happened to 

get that done? Did it happen over a week’s period, 2 weeks’ period, 

a day’s period, 2 hours? How did you get all five guys together? Or 

gals or guys. What is the makeup of the Board, the five who exist 

today? 

Mr. ALVAREZ. We have five Governors. There is one woman and 

four men. And the extension of the credit at the time—at the time 

the Bear Stearns loan was made, there were 5 men. We had them 

all on the phone during the night before the loan discussing the financial condition of Bear Stearns, discussing market conditions. 

We had a substantial amount of information that was coming in 

from the Federal Reserve Bank of New York and from other—and 

from the Administration, from their sources. Then we convened a 

Board meeting on that Friday morning as soon as everyone was 

able to get to the office. We actually had to use an emergency provision because there were only four Governors who could be available at the time the vote was taken. A fifth one was on a plane 

coming back from Europe. But the statute provides for a vote of 

less than 5 in that specific situation. 

Mr. PERLMUTTER. Did that same thing occur with Lehman Brothers? 

Mr. ALVAREZ. With Lehman Brothers, we did not extend credit. 

There was no— 

Mr. PERLMUTTER. But was there a meeting? Was there a discussion? Were there requests? 

Mr. ALVAREZ. There were constant updates with the Governors 

about the condition of the organization and the developments, 

whether there would be a purchaser or not a purchaser. So we, in 

those days leading up through the Lehman weekend, had quite a 

lot of conference call meetings. 

33 

Mr. PERLMUTTER. Thank you. 

The CHAIRMAN. I think the gentleman from Colorado has just 

given us an example of the kind of information that could come forward with no damage that people would like to hear. So this is, I 

think, an illustration of the kind of information and what it could 

bring forward without any problem. We are going to keep going. I 

am hoping if Mr. Watt is back in time, we won’t have a break. If 

members want to go vote, there is only one vote. It is the last vote. 

We do intend to keep going. I will stay as long as—so we will 

keep—we may just keep going continuously. Members can go vote 

and come back. The gentleman from Texas. 

Mr. HENSARLING. Good morning, Mr. Alvarez. Forgive me. I just 

came from speaking on the Floor. So if we cover some old material, 

I apologize. I was here at least for your initial statement and in 

it you talked about one of the concerns that the Fed had with the 

GAO audit with respect to the discount window and broad lending 

facilities that—and I am paraphrasing. Well, no. I will go ahead 

and quote. That could ‘‘significantly increase potential borrowers’ 

fears of stigma and adverse reactions.’’ To the extent it is analogous with respect to lining up for TARP funds, there didn’t seem 

to be a stigma associated with that. I am not sure the transparency 

kept people from accepting TARP funds. I am not sure it had— 

some would maintain it had a beneficial impact on the market. 

What might we be missing here? 

Mr. ALVAREZ. I think the TARP funds—it is useful to think of 

them in two parts, the CPP program, the original program, Capital 

Purchase Program, was presented as a confidence inducing program that was available to healthy institutions and designed for 

healthy institutions. And that is one of the reasons that I think institutions were at first very eager to participate because it gave 

them capital that they could use. They didn’t want to—and they 

wanted to make that—they wanted to be—have that capital available. As time went on, though, the participation, the CPP, as we 

have seen, has become something of a red letter and institutions 

are trying very hard to get out of the CPP program. Also, the other 

types of TARP programs include the more direct lending to folks 

like AIG and— 

Mr. HENSARLING. So you believe it is a red letter stigma as opposed to perhaps not wanting Congress involved in their business? 

Which is simply what I personally hear from the CPP— 

Mr. ALVAREZ. I am sure there is some of both. 

Mr. HENSARLING. If I could with the limited amount of time I 

have, Mr. Alvarez, and forgive me if this is old ground, but I want 

to talk a little bit about 13.3. Number one, in the Fed’s interpretation, what exactly are the limits on your 13.3 authority? 

Mr. ALVAREZ. The 13.3 can only be triggered if it is unusual and 

exigent circumstances. And we need a super majority vote of the 

Board of Governors finding that. And it is only lending. It is not 

investments. And it is only lending that is secured to the satisfaction of the lending reserve bank. Also there has to be— 

Mr. HENSARLING. So the Maiden Lane facilities which broke new 

ground, isn’t that something functionally beyond lending? 

Mr. ALVAREZ. The Maiden Lane facilities are very much the 

same thing as if those assets were kept on the books of JPMC and 

34 

we were lending against those assets at JPMC. This is actually a 

more transparent way to identify the assets, to keep track of the 

assets and to prevent them from being lost in a larger organization. 

Mr. HENSARLING. Speaking for myself, I do think it is important 

for the Fed to retain their 13.3 powers, but clearly they have been 

exercised in a way that I think has been totally unanticipated and 

certainly unprecedented in our Nation’s history. I simply do not believe that ultimately an unelected group of individuals should have 

unfettered ability to impose trillions of dollars of taxpayer exposure 

liability without some type of check or constraint by the people’s 

elected officials. 

So my question is, what constraints would the Fed be willing, or 

does the Fed feel any need for any constraints on their 13.3 powers 

whatsoever? 

Mr. ALVAREZ. The Administration has proposed having a dual 

key system as it were to have the Treasury approve 13.3 lending 

as well as the Board of Governors and the Chairman, my Chairman, Chairman Bernanke has offered the suggestion that if resolution authority is granted, then there may be no need for 13.3 lending by the Federal Reserve in situations where there is a specific 

institution that needs— 

Mr. HENSARLING. Now, it is the broad lending facilities—I am 

looking somewhat retrospectively. But if those broad lending facilities were enacted on a contractual basis, could you not have negotiated resolution authority? 

Mr. ALVAREZ. I don’t think we could have accomplished resolution authority with a contract because the investors and shareholders would have—the creditors— 

Mr. HENSARLING. Didn’t Chairman Bernanke say, I believe in 

this committee, that had he had resolution authority, AIG essentially would have been shut down? My question is, before you gave 

them the money, could you have negotiated resolution authority? 

Mr. ALVAREZ. He would have been able to—if there was resolution authority, use that tool rather than the Federal Reserve lending. 

The CHAIRMAN. Will the gentleman yield? I think the problem is 

in the absence of a bankruptcy, they could have negotiated with 

AIG but not with the creditors of AIG, that would have been the 

problem, that they could have gotten agreements from AIG as a 

condition of the money, but then that would have left the creditors 

legally free standing. 

Mr. HENSARLING. I see the time I didn’t have— 

The CHAIRMAN. Actually, we were in expiration time when I said 

it. I am now going to recognize the gentlewoman from Illinois and 

go vote. And she will question in lonely splendor, but the gentleman from North Carolina is on his way back and we will continue. The gentlewoman from Illinois is recognized for 5 minutes. 

Mrs. BIGGERT. I just have a couple of quick questions, Mr. Alvarez. Have any of the financial institutions provided any feedback 

regarding the possible adoption of this new transparency policy? 

Mr. ALVAREZ. I am sorry. Which transparency—what the Federal 

Reserve has been—the information we have been making publicly 

available? 

35 

Mrs. BIGGERT. No. Have the financial institutions talked to the 

Fed about the possibility of this bill being enacted and the transparency policy? 

Mr. ALVAREZ. I am not aware of financial institutions weighing 

in on the Ron Paul bill, H.R. 1207. There have been some economists who have issued a letter—suggesting that would undermine 

the independence of monetary policy. 

Mrs. BIGGERT. And that is all that you have heard then? 

Mr. ALVAREZ. There have been financial institutions weighing in 

on release of the names of borrowers at facilities and in fact in the 

litigation that was referenced earlier, as trade associations for borrowers have actually written in that would cause them to be uninterested in participation and it would damage them. 

Mrs. BIGGERT. So that really would apply to the bill in effect 

even though it wasn’t addressing the—initiation an indirect way. 

Just one other question, and maybe this was asked already, but 

given how the Federal Reserve actions affect the value of the dollar, would greater transparency improve international confidence 

in the dollar? Or would it be less? 

Mr. ALVAREZ. The information about the Federal Reserve’s transactions, the overall information about Federal Reserve transactions 

with foreign governments is disclosed in summary on our balance 

sheet. But also, the facilities, the specific swap facilities that we 

have are listed in detail in the information we make available to 

the public. So that already is okay and doesn’t undermine confidence. 

Mrs. BIGGERT. Okay. I have to go vote too, so I will yield to Dr. 

Paul. 

Dr. PAUL. You are very lucky. I am back, and I have unlimited 

time. 

Mr. ALVAREZ. It is always a pleasure to see you. 

Dr. PAUL. So let me think about this and keep this thing going 

because we do want to conclude our hearing shortly. But I might 

get more specific on some of the questions I talked about earlier 

having to do with, say, the international events. I have been particularly interested in that. And we do repeal that provision in the 

code that says that you aren’t responsible for telling us about that. 

Now, I am sure you think I have overstated this position about 

when the Federal Reserve gets involved in agreements with other 

central banks and other governments. Why doesn’t that borderline 

along the line of having a treaty or an agreement and being allowed to finance that outside the appropriations process? 

Mr. ALVAREZ. Well, we are not—I think it overstates what the 

Federal Reserve does. We set up accounts with foreign entities, foreign central banks, to allow them to conduct their business in the 

dollar. So there are dollar reserves that foreign countries have. 

Sometimes foreign countries buy U.S. Government securities. They 

need a place to deposit their securities and the interest that comes 

from those securities. 

That is not providing financial assistance to foreign governments. 

We are simply acting— 

Dr. PAUL. But, indirectly, wouldn’t it be? If you have a guaranteed loan, even though you might not say it is literal financing, but 

if you guarantee something and they agree to do something. What 

36 

if you want them to intervene in the currency markets; you might 

ask them to do that, wouldn’t you? 

Mr. ALVAREZ. That is an aspect under the responsibility of the 

Treasury. That is not the responsibility of the Federal Reserve. 

Dr. PAUL. Yes, but I think you work rather closely. You are both 

on the President’s Working Group on Financial Markets, so you 

collude there on what you might do. 

Are you aware of any precise times that the Federal Reserve gets 

involved in the gold market? Because, actually, there is authority, 

in the Exchange Stabilization Fund at least, to be involved. But 

what do you know about the Fed ever being involved in the gold 

market, whether it is the futures market or loaning gold? Because 

a lot of central banks are in the loaning and selling of gold constantly. 

Mr. ALVAREZ. And the Federal Reserve Bank of New York is a 

trustee for some of the gold stock of foreign central banks. It holds 

the gold. But it doesn’t conduct transactions itself in that gold. 

That is done by the foreign central banks. 

Dr. PAUL. But you have no evidence that our Federal Reserve 

has ever been involved in the gold market? 

Mr. ALVAREZ. I confess not to being an expert in transactions we 

might have done in gold over the history of the Federal Reserve, 

but we could get you that information. 

Dr. PAUL. Of course, what I am suggesting, the reason for the 

audit is to find out whether indirectly we might be involved by 

going it another central bank or a government and doing the work 

that we want to do. And that is why I think the full audit is necessary. 

And I believe we have had the return, and I am willing to yield 

back. 

Mr. WATT. [presiding] I thank the gentleman. 

Mr. Grayson from Florida is recognized for 5 minutes. 

Mr. GRAYSON. Thank you, Mr. Chairman. 

Mr. Alvarez, has the Federal Reserve ever tried to manipulate 

the U.S. stock market? 

Mr. ALVAREZ. No, sir, not that I am aware of. 

Mr. GRAYSON. Not that you are aware of, but you are the attorney, right? 

Mr. ALVAREZ. That is right. 

Mr. GRAYSON. So you might not even know, right? 

Mr. ALVAREZ. I would expect to know if there were something 

like that being done. I am not aware of that at all. 

Mr. GRAYSON. And if you did know, you would be bound by attorney-client privilege and you wouldn’t be able to tell us, right? 

Mr. ALVAREZ. Sir, if there were something the Federal Reserve 

was doing outside its legal authority, I would have an obligation to 

say something about that. 

Mr. GRAYSON. All right. So we agree that any participation by 

the Federal Reserve in the stock market or the futures market is 

outside the Federal Reserve’s legal authority, right? 

Mr. ALVAREZ. The Federal Reserve has some authority to regulate various aspects of markets and participate in markets in certain ways. So I think your question is too categorical, but— 

Mr. GRAYSON. I think not, actually. Why don’t you answer it? 

37 

Mr. ALVAREZ. I don’t know—your question is so overbroad, I 

don’t know where to begin to answer that. 

Mr. GRAYSON. I don’t think it is that overbroad. I would like you 

to tell me whether it is within the Federal Reserve’s legal authority 

to try to manipulate the stock market or the futures market. 

Mr. ALVAREZ. I don’t believe the Federal Reserve tries to manipulate the stock market. 

Mr. GRAYSON. ‘‘Tries?’’ Come on. Do they? 

Mr. ALVAREZ. The Federal Reserve’s obligation and what it does 

in monetary policy is try to influence interest rates and, in that 

way, to maximize employment and to stabilize prices. I am not sure 

how that fits into your question. 

Mr. GRAYSON. Now, if, in fact, the Federal Reserve were trying 

to do that, or doing it, isn’t that something that we would want to 

know? 

Mr. ALVAREZ. To the extent that the Federal Reserve influences 

interest rates, it does make announcements of that decision immediately. It takes— 

Mr. GRAYSON. That is not what I said. I said, manipulate the 

stock market or the futures market. Wouldn’t we want to know? 

Yes or no? 

Mr. ALVAREZ. Could you define what you mean by— 

Mr. GRAYSON. I think you know what I mean, Mr. Alvarez. Now, 

wouldn’t it be very helpful to have a GAO audit on that subject? 

Wouldn’t it? 

Mr. ALVAREZ. I don’t know what it is that you are seeking to 

audit, sir. 

Mr. GRAYSON. What I just said. 

Mr. ALVAREZ. It would be helpful if you could outline your— 

Mr. GRAYSON. Let’s go on to something else. Does the Federal 

Reserve actually possess all the gold that is listed on their balance 

sheet? Do they actually possess it? 

Mr. ALVAREZ. Yes. 

Mr. GRAYSON. Has that been audited by the GAO? 

Mr. ALVAREZ. I believe that is within the GAO’s authority to 

audit. It certainly is something that our independent accountant is 

able to verify and does. 

Mr. GRAYSON. So if I go in and ask for a GAO audit, you won’t 

oppose it, right? 

Mr. ALVAREZ. To auditing the presence of gold on the facility? I 

don’t see any reason to object to that. 

Mr. GRAYSON. Good. 

Now, there have been all sorts of claims of insider trading and 

front-running by the people who execute the trades for the Federal 

Reserve in the market—by the way, who is that? Who actually executes the trades for the Federal Reserve in the markets? 

Mr. ALVAREZ. I haven’t heard of any allegations of front-running. 

Mr. GRAYSON. Well, that is funny, because you are the general 

counsel, so if anybody would know about it, you would think you 

would know about it. 

Mr. ALVAREZ. The Federal Reserve Bank of New York is responsible for effecting the transactions, implementing monetary policy. 

Mr. GRAYSON. Okay. So, then, answer the question. 

Mr. ALVAREZ. The Federal Reserve Bank of New York. 

38 

Mr. GRAYSON. That is your answer? 

Mr. ALVAREZ. You wanted to know who implements— 

Mr. GRAYSON. You have people sitting at screens at the Federal 

Reserve Bank actually executing those trades? You don’t delegate 

that to anyone else? 

Mr. ALVAREZ. No, the Federal Reserve Bank of New York—of 

course it is a process where there are several steps. The Federal 

Reserve Bank of New York executes transactions through primary 

dealers. 

Mr. GRAYSON. Okay. Who are the primary dealers? 

Mr. ALVAREZ. The list of primary dealers is on our Web site. 

Mr. GRAYSON. Do you know any of them? Can you name a single 

one? 

Mr. ALVAREZ. Sure. JPMC. 

Mr. GRAYSON. What? 

Mr. ALVAREZ. JPMorgan Chase. 

Mr. GRAYSON. Okay. Do you mind if we have a GAO audit to see 

whether there has been front-running or insider trading by them? 

Do you mind? Is that okay with you? 

Mr. ALVAREZ. I am not sure I have any decision-making authority. 

Mr. GRAYSON. Well, you are the General Counsel. I want to know 

if you are going to try to stop it. 

Mr. ALVAREZ. GAO audits government agencies, and you want 

the audit of a private entity. I think that is something that Congress would have to change the authority of the GAO to allow. 

Mr. GRAYSON. All right. Now, let’s say—you are right. That is 

what we are doing right here, by the way. Let’s say that the Federal Reserve gave a billion dollars to a very promising fledgling institution called the Dick Cheney Savings and Loan, whose only 

asset is an unnumbered Swiss bank account. Don’t you think it 

would be a good idea to have the GAO have authority to look into 

that? 

Mr. ALVAREZ. Under the GAO authority as written, a loan by the 

Federal Reserve to a specific entity, say, a particular bank, as you 

have pointed out, would be subject to GAO audit. We don’t oppose 

that. 

Mr. GRAYSON. All right. Now, the Federal Reserve has given $1 trillion out, $1 trillion in the past 12 months. That is how much 

the increase in its assets and liabilities on its balance sheet has 

been. Who got the money? This, by the way, is a question sent to 

me by Beatrice Delgado. She just wants to know who got the 

money. Will you tell me? 

Mr. ALVAREZ. Most of the increase in our balance sheet has been 

the purchase of U.S. Government securities and the purchase of 

agency guaranteed securities in the open market from market participants broadly. 

Mr. GRAYSON. And what about the rest of it? 

Mr. WATT. The gentleman’s time has expired. 

Mr. GRAYSON. All right. Thank you, Mr. Chairman. But I really 

think we need answers to these questions, and the only way to get 

answers to these questions is to have the GAO audit the Federal 

Reserve. 

Thank you very much. 

39 

Mr. WATT. I just wanted to make the point that, if the gentleman 

has more questions, there will be an opportunity to submit them 

in writing. That opportunity will be available. 

The gentleman from California, Mr. Royce, is recognized for 5 

minutes. 

Mr. ROYCE. Thank you. 

Let me ask Mr. Alvarez, the Austrian economist von Mises, who 

did a lot of studies in terms of business cycles, came to the conclusion that central banks really have a tendency to, sort of, extenuate 

or exacerbate those business cycles. And looking back at what the 

Fed did in 2002 through 2006 by setting negative real interest 

rates in June of 2002 forward, it would match the thesis that the 

Austrian economist always put forward, the thesis that the Fed 

had this tendency to set interest rates too low and, as a consequence, from time to time, create these asset bubbles—a housing 

bubble, in this case. 

Looking back, when you look at what the Fed did during that 4- 

year period, and when you look at the fact that central banks in 

Europe followed suit and did the same thing, do you think that thesis might be right, and that was one of the reasons that we had 

such a balloon in the housing market? 

Mr. ALVAREZ. Congressman, as a lawyer, there is good reason 

they don’t let me be involved in monetary policy. And so, I apologize, but I can’t give you an educated answer to that question. 

Mr. ROYCE. All right. Then let’s talk about another issue. We had 

a hearing here yesterday, and we listened to Paul Volcker. And he 

criticized President Obama’s Administration’s plan to subject, ‘‘systemically important financial firms to more stringent regulation by 

the Federal Reserve.’’ 

In his testimony to the House Financial Services Committee, Mr. 

Volcker said—and I am just reading from Bloomberg News, but we 

heard him say it yesterday—‘‘Such a designation would imply government readiness to support the firms in a crisis, encouraging 

even more risky behavior in a phenomenon known as ‘moral hazard.’’’ 

Would you like to comment on Paul Volcker’s opposition to having the Fed walk down this road with the Administration and his 

concern about the consequences of that moral hazard? 

Mr. ALVAREZ. We, too, are very concerned about moral hazard 

from the designation of systemically important institutions. But we 

are concerned that the point we are starting from is that too much 

of the public believes that some institutions are ‘‘too-big-to-fail.’’ So 

the moral hazard problem already exists. 

And that is why we are asking for actually two revisions. One 

is a new resolution regime, resolution authority, because that helps 

offset moral hazard by making it clear that the government doesn’t 

have to simply bail out institutions because they are afraid of them 

going into a disorganized bankruptcy. Instead, you have a resolution regime where the government can impose haircuts on shareholders and creditors as appropriate, and that will help reinstitute 

market discipline. 

The second thing is more strenuous regulation and supervision 

of those institutions that are systemically important, including enVerDate Nov 24 2008 17:39 Apr 09, 2010 Jkt 054871 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\54871.TXT TERRIE
40 

hanced capital requirements, enhanced risk management requirements, and other things to offset the moral hazard. 

Mr. ROYCE. Well, listen, I am all for market discipline, but when 

the Richmond Federal Reserve says that 45 percent of the liabilities in our financial system back in 1999 were backed by the safety net of the Fed, were basically guaranteed in one way or the 

other by the Fed—and you know that number is far greater today. 

Whether or not you agree with the steps taken in recent months 

to prop up financial institutions—I voted against the bailouts, but 

whether you agree with it or not, it is apparent the Federal Reserve became the path of least resistance for many of those bailouts. Hence our concern here. 

So let me go to the final point made by Paul Volcker, who is the 

White House Economic Recovery Advisory Board chairman who is 

so adamantly against the Administration’s plan here. He says, 

‘‘The danger is that the spread of moral hazard will make the next 

crisis bigger.’’ 

Now, if the last time you had a moral hazard problem, in that 

there was a presumption that the Fed was going to bail out 45 percent of the institutions, and now I think you would concede it is 

a lot bigger than that, why wouldn’t you heed Volcker’s words 

here? And why wouldn’t we really be looking at some solutions to 

bring about market discipline? 

And why wouldn’t we be considering that von Mises and others 

were right in this whole issue of the Fed actually helping to compound our problem, in terms of boom and bust cycles, through your 

mismanagement— 

The CHAIRMAN. The gentleman’s time has expired. If you want 

him to answer, we will give him a few seconds. 

Mr. Alvarez, you can respond briefly, or you can do it in writing. 

Mr. ALVAREZ. The question is so complicated, I think in writing 

is probably better. 

The CHAIRMAN. All right. 

The gentleman from Minnesota is next. 

Mr. PAULSEN. Thank you, Mr. Chairman. 

Well, first, I just want to say I support Representative Paul’s effort to bring this legislation to the forefront. And I think we do 

need to review the responsibilities of the Federal Reserve to have 

a better sense of where we are today. 

Before the economic and financial crisis that we went through a 

year ago, we didn’t see the Fed on the front page of the paper or 

in the headlines or even see the Chairman give an interview on ‘‘60 

Minutes.’’ That was really unprecedented. And so I think it is only 

natural that a lot of people are asking questions about what the 

Federal Reserve really is about, as opposed to just the open market 

meetings that happen when they determine interest rates, for instance. So I think that given your role in the bailouts or AIG, etc., 

it is only natural to expect some interest in looking at this. 

Since you are exercising the Section 13(3) authority and invoking 

emergency powers, if you will, why shouldn’t we have a little bit 

more, as Members of Congress, the ability to look at where the Fed 

is going, understanding what is on the balance sheets? 

We are no strangers to the fact that Chairman Bernanke’s words, 

in particular, can move markets when he speaks. And it just seems 

41 

to me that, why shouldn’t you believe or why should we believe 

that pulling the veil back on some of the Fed’s activities and exposing some of these secrets of the temple, if you will, could similarly 

move markets in significant ways and expose firms who may not 

be doing so well? 

Mr. ALVAREZ. Congressman, in order to allow you to have that 

kind of oversight, we provide substantial information about our activities and balance sheet. I think part of the difficulty is we 

haven’t been as good as we should be about making clear how 

much information we do provide to the public. 

Our Web site is filled with information about our balance sheet, 

which is audited by an outside accounting firm. All of our programs 

are explained in detail on the Web site. We have a monthly report 

that updates the exposures we have under the different facilities, 

including information about the collateral, general information 

about the borrowers, about the timing of the facilities, when they 

are intended to unwind, and the protections we have gotten for the 

taxpayer. 

In the monetary policy area, we issue, as I mentioned, the decision, the moment it is made, detailed minutes shortly thereafter 

and then a complete transcript and the all the underlying memos 

after a lag. 

There is a lot of information that we provide on all of our areas 

of responsibility. And it is not as secretive as I think it has been 

thought to be. Many of these strides are new, done in the last 3 

or 4 years. And so, it is quite a change from the days of the secrets 

of the temple that were referenced earlier in the day. And I think 

you will find that information very helpful. 

Mr. PAULSEN. Well, just to follow up, I just think, knowing taxpayers are paying more attention now—even when I attend parades, people ask me about Representative Paul’s bill because they 

want to ask questions about some of the secrecy that has been out 

there. And some of this may have been more revealed in the last 

few years, as you mentioned, but it is really only the last year, in 

particular, where we have seen the Fed on the front pages in all 

the headlines, 3 times a week, for instance. 

And that is probably going to continue in the near term, knowing 

that the Fed is holding and buying a lot of debt and buying it from 

the Treasury. You have one government agency essentially borrowing from another, and the taxpayers are going to, in essence, 

be required to bail out the government side. So you will see continued pressure, I think, from Members of Congress down the road on 

this, as well. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Florida, Mr. Posey. 

Mr. POSEY. Thank you very much, Mr. Chairman. 

Besides calling for an audit, we know that Dr. Paul’s bill makes 

five other changes, fairly simplistic changes. And for the sake of 

transparency and to put things in a proper perspective, I am just 

going to refer to those sections of the code verbatim. Many people 

in the public would be surprised about what is currently secret, so 

to speak. The law now reads, under regulations of the Comptroller 

General, ‘‘The Comptroller General shall audit an agency but may 

carry out on-site examination of an open insured bank or a bank 

42 

holding company only if the appropriate agency has consented in 

writing.’’ 

I would like your comments, because we are not going to have 

time for you to respond to all my questions now and get answers. 

I would like, with the chairman’s permission, to request that you 

give us specific answers to that question as soon as possible, why 

you think that permission of another agency is necessary for the 

Comptroller General to perform an audit it referred to on a bank? 

Number two, current law says—and Dr. Paul’s bill is deleting 

this—‘‘Audits of the Federal Reserve Board and Federal Reserve 

Bank may not include transactions for or with a foreign central 

bank, government of a foreign country, or non-private international 

financing organization.’’ 

Now, I would like you to answer in writing—and you can do it 

verbally if you have time, but I think my questioning will probably 

take the remainder of my time—how this could possibly hurt the 

function of the Fed, and, if not on a daily basis, maybe with just 

a short cooling-off period, as the chairman referred to, but these 

should not be even potentially eternally secret actions. 

The next thing it does, number three, is, ‘‘It shall not include deliberations, decisions, or actions on monetary policy matters, including discount window operations; reserves of member banks; securities credit, interest, or deposits; and open market operations.’’ 

It astounds me that anybody would think that would be harmful 

to become public information. 

Number four, transactions made under the direction of the Federal Open Market Committee. Now, how is that information going 

to harm the financial security of our Nation if it is no longer off 

limits? 

And finally, number five, a part of a discussion or a communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System relating to 

aforementioned clauses 1 and 3 of this subsection. 

The idea that any of that must be eternally secret for the financial security of this Nation is incredulous to me. And you can start 

now, if you would like, responding to those items. But those are 

where the fork meets the grits here, so to speak. These are the 

things that the bill actually talks about. We have gone and we 

have talked in some platitudes here and some wherefores and 

whereases, but that is the real basic elements of Dr. Paul’s bill. 

Mr. ALVAREZ. If I could address at least one of the points, you 

mentioned the limitations on disclosing information about open 

banks— 

Mr. POSEY. Well, we should probably start with number one 

right off the bat. Why do you have to have the appropriate agency’s 

permission for the comptroller general to perform an audit? 

Mr. ALVAREZ. Of open banks? 

Mr. POSEY. Yes. 

Mr. ALVAREZ. Yes. The concern there is that disclosure of information about the operations of an open bank—any number of 

banks that are not experiencing difficulties—would be misunderstood and cause difficulties for the bank, a bank that is open and 

operating and that requires the public’s confidence. 

43 

And so, consulting with the primary regulator of the bank, which 

is responsible for examining the bank and whose reports by law are 

not made public, is designed to ensure that misleading or mistaken 

information about the health of that bank isn’t released. It is 

meant to protect the bank, which is an open institution. And its 

only dealing with open institutions, in your example, is to protect 

that bank— 

Mr. POSEY. Just a second. Do you not think that, if we had some 

audits and they been public 2 or 3 years ago, we might have not 

have ended up in the crisis we are in now? Did the secrecy not protect some of the misbehavior by some of the banking industry, do 

you think? 

Mr. ALVAREZ. I, personally, don’t think if GAO had audited the 

investment banks or the large banks in the United States that 

GAO would have been able to stop the crisis any better than the 

other agencies. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Illinois, Mr. Manzullo. 

Mr. MANZULLO. Thank you, Mr. Chairman. 

I am a cosponsor of H.R. 1207. I hope that it proceeds to the 

Floor without being watered down too much. 

The big concern of the American people really has to go to what 

happened in September of last year when the Secretary of Treasury 

came to the Members of Congress and said he needed immediately, 

overnight, $787 billion to buy out troubled assets, otherwise the 

world was going to collapse. And not 1 cent has been spent of that 

money on buying out troubled assets. We are going on a year now, 

people are still waiting, and Members of Congress—and I voted 

against that—are still wondering why they voted on it. 

But let me ask you this question, Mr. Alvarez. Whenever the Fed 

gets involved, for example in pumping money into AIG, etc, is that 

actually reflected as part of the national debt? 

Mr. ALVAREZ. No, sir, it is not part of the national debt. It is 

fully disclosed on our balance sheet, and it shows up on the Federal 

Reserve’s balance sheet, but it is not part of the outstanding debt. 

Mr. MANZULLO. So, it is monetized; you just print money. Is that 

correct? 

Mr. ALVAREZ. Not exactly. And this is an area where, again, I am 

not an expert. The Federal Reserve does a variety of transactions 

to support its lending activities. It lends basically—it has government securities that it can sell in order to raise the funds to make 

loans. But that is not monetizing the debt. 

Mr. MANZULLO. So you are saying that, for all the money that 

has been pumped into these various institutions, that the Fed, and 

the Treasury ostensibly, has sufficient reserves to back that up in 

case of a collapse? 

Mr. ALVAREZ. I believe the Federal Reserve does, yes. 

Mr. MANZULLO. One of the other problems—in fact, I have a constituent from Cary, Illinois, who has followed this very closely, 

along with lots of other constituents. People are really distrustful 

of the Fed based upon the cloak of secrecy that takes place. But 

the areas that are of most importance, dealing with monetary policy and the discount window are the two most important parts of 

the Fed. In fact, on page 6 of your testimony, it says, ‘‘Congress 

44 

purposefully and for good reason chose to exclude from GAO review 

only two highly sensitive areas: monetary policy deliberations, decisions, and actions, including open market and discount window; 

and the other is Federal Reserve transactions dealing with foreign 

countries.’’ 

So you have actions and transactions that are excluded from 

GAO review. It would take an Act of Congress, would it not, in 

order to go into these two areas? 

Mr. ALVAREZ. Yes, sir. 

Mr. MANZULLO. Okay. And that is what H.R. 1207 attempts to 

do, isn’t that correct? 

Mr. ALVAREZ. That is correct. 

Mr. MANZULLO. So the very body that sets the policy of review, 

would you not agree, also has the authority to change that policy? 

Mr. ALVAREZ. Oh, absolutely, sir. 

Mr. MANZULLO. And so Members of Congress, you would agree, 

who are very concerned with trying to track all this money believe 

that, by having more transparency, the American people will have 

a better idea as to where their taxpayers’ dollars are spent? 

Wouldn’t you agree that the American people have a tremendous 

amount of interest in this? 

Mr. ALVAREZ. This is certainly an area for Congress to consider. 

We are here simply providing our views on what the ramifications 

would be of that kind of congressional action, and we are concerned 

about the effects of making the change that H.R. 1207 would make. 

But it is clearly a decision for the Congress. 

Mr. MANZULLO. I may submit some questions to you, but I want 

to thank you for your time and your demeanor. 

Mr. ALVAREZ. Thank you. 

Mr. MANZULLO. Thank you. 

The CHAIRMAN. The witness is excused. 

I appreciate Mr. Alvarez once again giving us his time. He and 

other members of the Federal Reserve System have been very cooperative. And I do think it is the case that, if you compare the 

amount of information that has been released about the actions, 

the decisions, the operation of the Federal Reserve, there has already been an enormous difference. And I think that makes me 

confident that we can go, frankly, the fairly small steps further 

that we need to to complete this. 

Mr. ALVAREZ. Thank you. 

The CHAIRMAN. We will now have our next witness, Mr. Thomas 

Woods from the Ludwig von Mises Institute. And I apologize for 

having, in my prior life, mispronounced that. My German isn’t as 

good as it could be. Neither is my English. 

Mr. Woods? 

Oh, Mr. Paul will introduce the witness. 

Dr. PAUL. Thank you, Mr. Chairman. 

Thomas Woods is a senior fellow at the Ludwig von Mises Institute in Auburn, Alabama. He graduated from Harvard University 

and received his master’s and Ph.D. from Columbia University. 

He is the author of nine books, of which two were New York 

Times best sellers, including, ‘‘Meltdown: A Free Market Look at 

Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.’’ He also won a prize 

45 

in 2006, the 2006 Templeton Enterprise Award, for his book, ‘‘The 

Church and the Market: A Catholic Defense of the Free Economy.’’ 

Dr. Woods is also a contributing editor of The American Conservative. 

I welcome Dr. Woods as a witness before this committee. 

The CHAIRMAN. Please, Dr. Woods. 

STATEMENT OF THOMAS E. WOODS, JR., PH.D., LUDWIG VON 

MISES INSTITUTE 

Mr. WOODS. Thank you, Mr. Chairman, Congressman Paul, and 

other members of the committee. 

Let me begin my summary of my written testimony in support 

of H.R. 1207 by recalling a controversy that erupted in late 2008. 

Bloomberg News ran a headline, ‘‘Fed Defies Transparency Aim in 

Refusal to Disclose,’’ and the article dealt with trillions of dollars 

in loans whose recipients and whose collateral that had been put 

up were unknown to the American people. The editor-in-chief of 

Bloomberg News, Matthew Winkler, stated it very simply. He said, 

‘‘Taxpayers, involuntary investors in this case, have a right to 

know who received loans, in what amounts, for which collateral, 

and why specific loans were made.’’ 

Well, he is right, of course. There is no good reason for Americans not to know the terms and recipients of these loans. There is, 

likewise, no good reason for them to be kept in the dark about the 

Fed’s arrangement with foreign governments and foreign central 

banks. These things affect the quality of the money that, in our 

system, Americans are obliged to accept. 

Now, this seems like common sense, so what are some of the 

common arguments that have been raised against H.R. 1207? Well, 

it would compromise the Fed’s independence. And, eventually, if we 

open the books, this will lead inexorably to some kind of influence 

over monetary policy being exercised by Congress. 

I think this is a red herring. The bill neither envisions nor calls 

for any such thing. In fact, the bill is not designed to have Congress have any authority over setting interest rate targets or any 

such thing as that. This is part of the Fed’s central planning apparatus, and it is best to keep this away from the Fed or Congress, 

in my judgment. 

But, ultimately, all we are doing is looking to open the books. 

Congress has a moral and legal responsibility to keep tabs on and 

keep the public informed about the various creatures it brings into 

existence. So these various convoluted scenarios by which merely 

opening the books will eventually lead to a floodgate of an inflationary catastrophe at the hands of an uppity Congress, I think, 

are a little over the top. 

Now, at the same time, we hear this objection all the time about 

the Fed’s independence, so we should investigate that issue. How 

independent is the Fed? Well, how independent could it be if the 

Fed Chairman is, of course, routinely up for reappointment? The 

Chairman typically wants to ingratiate himself into the favor of the 

President and often will accommodate him with loose monetary policy. 

Moreover, try to imagine a Fed Chairman who doggedly insisted 

on maintaining the value of the dollar, even if it meant refusing 

46 

to monetize a massive deficit to fight a war or so-called stimulate 

a depressed economy? You can’t imagine it. 

If there is any truth to the idea of Fed independence, it is in precisely this: that the Fed, as we have seen in recent years and 

months, has the ability to extend trillions of dollars to unidentified 

recipients on undisclosed terms. Now, if that is what we are talking 

about, I find it hard to imagine any self-respecting American who 

isn’t bought and paid for hesitating for a minute to challenge that. 

Now, we have also heard that this type of legislation might politicize lender-of-last-resort decisions. Well, again, it does no such 

thing. You will find nothing in the text of the bill to justify that 

suspicion. 

But even if it did, how is this a departure from current practice? 

I think most Americans, you are going to have a hard time persuading them that the decisions made regarding the various bailouts were all made entirely with an eye to the public good and entirely disinterested and were not political at all. I think some 

Americans—and this ranges from progressives all the way to traditional conservatives—have rather a different thesis in mind, which 

is that, for instance, Goldman Sachs just might have a little more 

political pull than the rest of us. 

Well, let me also make clear that supporters of this bill are not 

interested in a watered-down version of the bill. This would only 

further stimulate suspicion that somebody is hiding something. 

Now, it seems to me the audit is coming. The writing is on the 

wall here. Seventy-five percent Americans polled agree that the 

Federal Reserve should be subject to the GAO audit that 1207 has 

in mind. If the legislation should fail, well, it seems to me that we 

will only further stimulate interest and transparency in the Fed, 

because people who up to this time hadn’t had any interest in the 

issue will being to wonder, ‘‘What could they be hiding?’’ 

So I think it is probably best for the Fed simply to accept that 

the audit is coming. I think that would be a more dignified way of 

handling the situation than what we have seen from the Fed thus 

far, which has, by and large, been the approach of urging Americans, urging the peons who populate the country to quit pestering 

their betters with all these impertinent questions. I think the Fed 

should take to heart the words that Americans hear every time a 

new Federal surveillance program is uncovered: If you have done 

nothing wrong, you have nothing to worry about. 

Thank you. 

[The prepared statement of Dr. Woods can be found on page 71 

of the appendix.] 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. 

Mr. Woods, on behalf of Congress, I thank you for the political 

advice you have given us. And I suspect the folks over at the Fed 

would thank you for the advice that you have given them about 

how they should approach this issue. On a substantive basis, I 

don’t know that I heard much here that would help us be informed 

about the substance of what we are here to do. 

Is there anything in the bill, that you are aware of, that would 

deal with the Fed Chair being reappointed by the President? There 

is nothing in this bill that is going to address that, is there? 

47 

Mr. WOODS. No, there isn’t. The reason I mentioned— 

Mr. WATT. Okay. All right. I am just trying to figure out whether 

we are having a philosophical discussion here or a substantive discussion. 

You mentioned opening the books, which I think we all are supportive of. Do you distinguish between an audit of the kind that 

most people would think of as an audit and a policy audit, or do 

you not make that distinction? 

Mr. WOODS. I think, in this case, given that Congress has delegated to the Federal Reserve System the power to make monetary 

policy and, in this case, the Federal Reserve System and the enforcement of the system is a creature of the Federal Government 

and an active— 

Mr. WATT. I understand that, Mr. Woods. I am asking you, would 

you, for the purposes of this bill, or for deciding whether to do or 

not do whatever we are talking about, give the authority under this 

bill—would you make a distinction between a policy audit and 

opening the books, as you say, which would be a numbers audit? 

Mr. WOODS. Well, the reason I answered the question as I did— 

Mr. WATT. Would you make a distinction first and then tell me 

why you would make the distinction? 

Mr. WOODS. I would like it know what they are doing all down 

the line. Now, we have talked—there has been some discussion 

about time lags that could be negotiated, in terms of— 

Mr. WATT. That is not the question I am asking. It might be the 

next question I ask. 

Mr. WOODS. I honestly thought it was, sir. 

Mr. WATT. I am trying to figure out whether you, as a practical 

matter, make a distinction between a policy audit and a numbers 

audit. 

Mr. WOODS. I would, indeed, like to know some of the rationales 

that go into these decisions. 

Mr. WATT. But do you acknowledge that there is a distinction? 

Mr. WOODS. Well, sure, there is. But— 

Mr. WATT. Okay. All right. 

Mr. WOODS. —it is in the fact that the Fed is created by an Act 

of Congress and enjoys a government monopoly. So, naturally, 

there is going to be a wider scope, and Americans would want to 

insist on a wider scope, of investigation of such an institution. 

Mr. WATT. Okay. 

Mr. Chairman, in the interest of time and with the recognition 

that we are not going to get any substantive responses here as opposed to another political speech, I think I will just yield back. 

Before I do that, let me ask unanimous consent to insert into the 

record a Wall Street Journal article dated July 15, 2009, ‘‘Economists Warn Fed Independence at Risk’’ and a document entitled, 

‘‘Petition for Fed Independence,’’ signed by numerous academic people— 

The CHAIRMAN. Without objection— 

Mr. WATT. —75 academics supporting the Fed’s independence. 

The CHAIRMAN. Without objection, it is entered into the record. 

The gentleman from Texas. 

Dr. PAUL. Thank you, Mr. Chairman. 

48 

I would like to follow up on an economic question regarding the 

secrecy of the Fed. If the Fed operates in secrecy and we don’t have 

transparency, I would like to see if you could expand a little bit on 

what kind of economic consequences this has. 

For instance, the free-market school is well aware of the fact that 

businesspeople make a lot of mistakes when interest rates are at 

an artificial level rather than at a market level. Interest rates 

aren’t there because of savings but because of economic policy. But 

this is along that line but not exactly that. 

Does the secrecy of the Fed inspire maybe some misguided speculations? Could this secrecy encourage more mistakes, maybe not be 

the cause of all the mistakes, but could this cause the businessman 

more difficulty? The other side tends to argue, well, we have to 

keep it secret because we don’t want to shake up the markets, and 

secrecy conveys confidence. 

Could you address that? And could the opposite be true? 

Mr. WOODS. I think the opposite is true. Because I think, when 

you have secrecy, inevitably what winds up happening, how do people make their judgments as to what is really going on? On the 

basis of wild speculation and wild unfounded rumors. So the more 

transparency you have, the less free rein is given to that type of 

irrationality. So the clearer we can be with the business community, the better. And the more they can understand, ‘‘Is this phenomenon that I am seeing real? Is it because there has been some 

Fed manipulation?’’ It is easier for them to make decisions if they 

are permitted to see the economy clearly. 

And I would, if Congressman Paul doesn’t object, I would like to 

add something about the subject of independence. The reason I 

raised it is that opponents of the bill are, I think, raising this as 

a red herring. This is not the subject of the bill. But, secondly, it 

is not, by any means, getting off the subject to question whether 

the much vaunted independence is actually real, whether there is 

already political influence on the Fed. That is entirely a warranted 

statement. 

So I did want to say that in my defense. But, Congressman Paul, 

you still have some time. 

Dr. PAUL. Right. And I want to touch on the subject of history, 

because I know you are also an historian. You did mention that 75 

percent of the American people support this effort to have more 

transparency over the Fed. But, in this recent court case, it was indicated, the Freedom of Information Act, that several rather mainstream groups supported this, as well. It isn’t just a fringe element 

that is requiring that. Dow Jones has supported this effort, New 

York Times, AP, Gannett, Hearst, Advanced Publications, and the 

Republica—the reporters’ commission on free press. So there are a 

lot of people who do support this. 

And, as I mentioned in my opening remarks, there has been a 

lot of this going on for a long time, but it seems like there is something historically important here. And could you address that in a 

more long-term, historical perspective? 

Mr. WOODS. Certainly. I think it is safe to say that, since 1913, 

as a political issue, the Fed has, by and large, succeeded in 

depoliticizing itself. And that, indeed, is the goal of the Fed, to 

some degree, is to isolate monetary policy from the public, the arVerDate Nov 24 2008 17:39 Apr 09, 2010 Jkt 054871 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\54871.TXT TERRIE
49 

gument being that technocrats can better handle this than regular 

Americans so we better isolate it from them. 

And so, what that means is that politicians, by and large, have 

not paid much attention to the Fed, until one presidential campaign I can think of in the last couple of years. Other than that, 

I can’t think of any presidential campaign that raised the Fed as 

an issue. 

So the fact that a bill like this comes forward, has hearings like 

this at the full committee level, when efforts like this have been 

tried in the past, as the chairman mentioned at the outset, and 

have failed, suggests that this is, indeed, a historic moment. 

I believe that the arguments being made against the bill are, by 

and large, a lot of scare tactics by the Federal Reserve, which is 

not used to being under this type of public scrutiny. 

I absolutely discount the bunch of academic economists who 

warn about the Fed’s independence. Without the Fed’s independence, it won’t be able to fight inflation as effectively and monitor 

interest rates as effectively. So, in other words, ‘‘We have just had 

the biggest asset bubble in the history of the world, thanks to the 

Fed, but if they lose their independence, they won’t be able to do 

as good a job as they have been doing.’’ This is really shocking, that 

we have professional economists who are going to take that position. It is an absurd position. It is at variance with the fact that 

the Fed has been the great enabler of inflation. And to say that we 

need it to be secret, need the books to keep it closed in order to 

prevent inflation from breaking out, shows an utter ignorance as 

to the causes of inflation. 

I also recommend an article by Lawrence White, now recently at 

George Mason University, and several years ago did an article 

looking at how influenced by the Fed the economics profession is 

in various ways. 

The CHAIRMAN. Let me just ask—first of all, I just want to say, 

you said there is all this time without a hearing. We are having 

a hearing because I decided to have one. I was a strong supporter 

of Henry Gonzalez in the late 1980’s when he pushed this. I have 

consistently asserted my right to critique monetary policy. 

In fact, Congress did once assert itself in this throughout the 

Humphrey-Hawkins Act over the objections of the Federal Reserve. 

And people might disagree ideologically with the formulation, but 

the central bank of the United States has a dual mandate, whereas 

most central banks have a single mandate, namely to fight inflation. Under the Humphrey-Hawkins Act enacted by Congress before I got here, the Federal Reserve has a mandate to worry about 

unemployment equally with inflation, or employment. And there 

have been efforts by Federal Reserve Chairs consistently to try to 

evade that, and we have blocked it. 

So I have always felt that. And we are having this hearing because it seemed to me an important thing for us to do. I am in my 

third year of the chairmanship; we did have some other items that 

grabbed our attention earlier. 

I do have one specific question. On the question of making public 

all of their transactions by themselves, do you think that should be 

done instantaneously, or do you think some time lapse is appropriate? 

50 

Mr. WOODS. I think, on this question, I wouldn’t take a dogmatic 

position. I am certainly open to a compromise on this. I think some 

type of reasonable time lag would not defeat the purpose— 

The CHAIRMAN. Good. I think, again, my view is that no one 

should be able to do business with the Federal Government in secret forever, but we do recognize that, if it is instantly available, 

there could be a market impact that would not be a good idea. So 

I appreciate that conceptual agreement. I think we can work together. 

The last thing, though, you did say, which troubled me, I must 

say, a little bit, is that essentially anyone who disagreed with you 

was bought and paid for. By whom? And what was the going wage? 

Maybe I have been missing out on something. 

Mr. WOODS. Well, my point was that, if you look at— 

The CHAIRMAN. No, I am asking you, by whom? You said somebody was bought and paid for. You must have been bought and 

paid for by somebody. 

Mr. WOODS. Well, in some cases, by the Fed itself. I think the 

Fed has exercised a tremendous influence, directly or indirectly, 

over the— 

The CHAIRMAN. Well, it is one thing to exercise influence; it is 

another to be bought and paid for. 

Mr. WOODS. Well— 

The CHAIRMAN. It is one thing—well, but I think language is important, Mr. Woods. And I don’t like— 

Mr. WOODS. But what about millions of dollars in research 

grants? 

The CHAIRMAN. Well, let me say this. My colleague has objected 

to people characterizing this as extremism. He pointed to these 

mainstream groups. Although, I will say, the number of us who 

will be surprised that mainstream media groups want more information—they want to know battle plans. So that is not mainstream; that is their own self-interest. 

But I think characterizing—basically you said anybody who 

would disagree—go back and look at your words—would be bought 

and paid for, I think that is an unfortunate formulation. I think 

there is room for intellectual disagreement here. And I think there 

are a lot of people probably on that list who weren’t bought and 

paid for in any tangible sense. 

Mr. WOODS. Well, I bet, though, if we did a poll of the various 

people who are calling congressional offices on behalf of the bill, I 

just can’t imagine that many are calling up and saying, ‘‘You know 

what? I am telling you, I am going to vote you right out of office 

if you open the books of the Federal Reserve.’’ 

The CHAIRMAN. Well, that is totally unresponsive to what I said, 

Mr. Woods. Why would you do that? I am talking about my objection, frankly, to your characterizing all of those who oppose this— 

and I am generally for it— 

Mr. WOODS. Well, perhaps it was— 

The CHAIRMAN. —as bought and paid for. I really would like to 

avoid that kind of— 

Mr. WOODS. Perhaps it was an unfortunate rhetorical flourish. 

But it was done in the spirit of— 

51 

The CHAIRMAN. Thank you. I would just advise you, as a witness, 

look, you are free to do it. Why don’t you leave the unfortunate rhetorical flourishes to us? We get paid for it. 

The gentlewoman from Minnesota— 

Mr. WATT. Mr. Chairman— 

The CHAIRMAN. Yes, I will yield to my colleague. 

Mr. WATT. I just want to discourage this gentleman back here 

from making props for the witness. Please, I am happy to have him 

sit in this room, but for him to be holding up that sign behind this 

witness, I think, is inappropriate. 

The CHAIRMAN. No, there will be no—sir, the police officer had 

some questions about what you were doing. I signaled to him that 

we had no objection to your sitting here. But I will in an evenhanded way enforce today what I have enforced with Code Pink or 

anybody else: no demonstrations; no signs. People are free to sit 

here. The gentleman from North Carolina is exactly correct. And 

there will be no conversation. 

The gentlewoman from Minnesota. 

Mrs. BACHMANN. Thank you, Mr. Chairman. 

I appreciate Mr. Woods being here. And I have had a chance to 

read about half of the book, and I really appreciate the book that 

you wrote, ‘‘Meltdown: A Free Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will 

Make Things Worse.’’ So thank you for your input on that. 

I enjoyed your statement, I have enjoyed your remarks. And I am 

wondering, you had asked the question in your remarks, why is the 

Fed in panic mode over this bill? Why are they in panic mode over 

this bill? 

Because it seems like we are in an era now when no politician 

can oppose transparency. That is what every politician is for, is 

transparency. And yet this seems to be the one anomaly in all of 

government. And yet it is at the fulcrum of our government, and 

it is at the fulcrum of, potentially, the economic meltdown that we 

are still going through and have yet to recover from. 

Why the panic? 

Mr. WOODS. Well, I think here we can only speculate, precisely 

because we don’t have the information. 

My suspicion is that I think they may be engaged in activity that 

they would rather not have disclosed to the light of day. The reason 

I emphasized in my statement that I believed that the standard arguments being made against the audit were unpersuasive and were 

not grounded in the text of the bill was thereby to leave open the 

possibility that the real arguments against their bill are not actually being advanced. 

But I can’t know what those are. I have my own private speculation as to things the Fed might be doing, but I elect not to mention 

them here. But that is what I think. 

There was an article in Forbes not long ago, and the title of the 

article was, ‘‘The Federal Reserve Needs To Be Boring Again.’’ And 

the thesis of the article was that the Fed has been doing so many 

unprecedented and extraordinary things, both qualitatively and 

quantitatively, over the past 2 years that it has attracted more attention to itself than we have seen in a very long time. And so it 

really has to stop doing that, so that people will go back to not payVerDate Nov 24 2008 17:39 Apr 09, 2010 Jkt 054871 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\54871.TXT TERRIE
52 

ing attention to it anymore and, as one member said earlier, not 

even really knowing anything about what it does. I think that is 

the way they like to do it. 

And I am not putting words in people’s mouths. Alan Blinder of 

Princeton wrote this in Foreign Affairs, ‘‘monetary affairs are best 

left to the technocrats.’’ That is his word, not mine. 

And so I think this is an unusual position for the Fed to be in, 

for the spotlight to be on it. And I think this makes them unhappy 

and nervous. 

Mrs. BACHMANN. One thing that I am concerned about is the 

Fed’s balance sheet and the toxic assets that remain on that balance sheet. Because, ultimately, we know that we will be the ones, 

the taxpayers of this country, to have to sop up the mess that is 

on that balance sheet. 

And I think the overnight loans, the fact that we don’t know who 

the overnight loans are going to, what the identities are and, as 

you had stated, the collateral, I think that makes a lot of us very 

nervous. I think maybe everything is fine behind the curtain, but 

we see that a lot of things aren’t fine in a lot of the great financial 

institutions that came to the brink of collapse and, in fact, did collapse. 

The other question I would have for you would be on Section 

13(3) and whether or not it would be prudent for the Congress to 

take a look at Section 13(3) and tightening that up and limiting the 

scope of the Fed’s authority. 

It seems to me, if we could get a full perspective of an audit, both 

on policy and on the numbers of the Federal Reserve, if we could 

get a full perspective of the Federal Reserve, what has been going 

on since 1913, that it would be easier for us to know if it would 

be prudent for us to tighten up the limitations on what they can 

do. 

I was shocked and didn’t read 13(3) until after the economic 

meltdown. When I read the breadth of the authority of the Federal 

Reserve, it struck me that they can do anything. They can do anything they want, and we are the ones, the American taxpayers, left 

holding the bag. And what check do they have? There is no check 

on that authority. And I think that is very frightening for the 

American people. 

And I am just wondering if you could comment in Congress on 

Section 13(3). 

Mr. WOODS. Okay. Well, I support exactly what you are saying. 

I think it makes perfect sense to tighten these things up. 

And I would also like to clarify, the way in which taxpayers get 

hit here may not be quite direct, but that if the Fed, let’s say, takes 

on an awful lot of toxic assets and these assets have very, very low 

value or zero value, then it impairs the Fed’s ability—when we are 

being promised, ‘‘Don’t worry, we will suck all this money back in,’’ 

well, if the balance sheet is overloaded with qualitatively degraded 

assets, how are they going to sell them? How are they going to get 

that money back in? And so then we will all suffer from the inflation tax. 

But, yes, I agree, I say turn the screws, absolutely. 

Mrs. BACHMANN. Let me ask you your perspective on inflation— 

The CHAIRMAN. The gentlewoman’s time has expired. 

53 

The gentleman from California. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

There is always a fight between democracy on the one hand and 

bureaucracy and plutocracy on the other. Secrecy does not lead to 

purity and technically correct decisions. Secrecy plus power equals 

corruption. That is especially true over time. That is especially true 

when it is the power not to set interest rates, but the power to lend 

money on concessionary terms to particular companies. 

Now, the chairman and many others in this committee have 

talked about needing to focus on 13(3). A number of my colleagues 

who are here now were not here when I questioned Mr. Alvarez, 

but his answers were very scary as to 13(3). Because the Federal 

Reserve Board has testified before that they will make only virtually no-risk loans under 13(3), but their general counsel testified 

that just about any loan in any amount would be allowed under 

13(3) as long as the Board felt secure. And that might very well 

mean they have a 51 percent chance of repayment; he wasn’t all 

that specific. 

So we have an agency that can now make not risk-free loans, but 

higher-risk loans, at least 51 percent—even on a junk bond you 

have a 51 percent chance of being repaid—in enormous amounts 

and, Mr. Woods, you are saying without any scrutiny as to how secure they are. 

If I gather your testimony correctly, you are saying that they 

have extended billions and billions of dollars of loans that they tell 

us are fully secured but they will not reveal to Congress what security they have? 

Mr. WOODS. That seems to be the case. And so, I think this is 

why this has become such a mainstream issue. This is why, of 

course, Bloomberg is in favor. And then Dr. Paul mentioned all 

these completely mainstream outlets who have nothing against the 

Fed, per se. They believe the Fed has an important role to play, 

but that this is unacceptable from the point of view of average 

Americans, who have a right to know what is going on with the institution that has custodianship of their money. 

Mr. SHERMAN. And even if this Fed made all the right decisions 

for all the right reasons, if you empower any agency to make highrisk loans or risky loans—not high-risk loans, but risky loans on 

concessionary terms, and to simply tell the public, ‘‘Don’t worry, 

you are fully secured’’ or ‘‘You are secured enough’’ or ‘‘We won’t 

tell you what security we have, but trust us,’’ and they can pick 

one company and not another, over time—one of the things that we 

do is we advise other countries on how to set up democratic institutions. Trust me, nobody at the State Department, nobody at 

USAID, nobody at DRL would suggest this kind of power plus secrecy, power to convey wealth to individual companies in enormous 

and unlimited amounts plus total secrecy. 

Mr. Woods, the Fed’s best argument against this bill is that the 

oral statements at the FMOC meetings should be kept private so 

that people can speak honestly. Would you think the bill would be 

impaired in its objectives if we just said, ‘‘Okay, you can speak freely at the FMOC meetings; the GAO isn’t going to read the transcript?’’ 

54 

Mr. WOODS. Well, this legislative aspect I would almost prefer to 

refer to Congressman Paul. Of course, there are different things. 

There is the Board of Governors, there are all sorts of different levels, where we can get some information now, 5 years after the fact. 

So now we know where Ben Bernanke stood on the interest rate 

question in 2003. 

But on a question like this, that really deals with a technical detail, I would defer to Dr. Paul. 

Mr. SHERMAN. Why don’t I yield to Dr. Paul? I don’t know if he 

was listening. 

Dr. PAUL. Well, certainly not permanently, but I would want to 

hear about them someday. They claim they released these anyway 

after— 

Mr. SHERMAN. Well, yes, I am just— 

Dr. PAUL. —years, but I think the sooner, the better. But, obviously, we don’t want to monitor and look at them the next day or 

the next week, but I would think that maybe 3 months or 6 months 

would be reasonable. 

Mr. SHERMAN. I look forward to working with you on this, because I would hope that we would pass legislation. And if we can 

take away the Fed’s best argument against it, I think that may 

help us. 

The CHAIRMAN. Or we could wait for the movie. 

The gentleman from California. 

Mr. SHERMAN. Wait for the movie? 

Mr. ROYCE. Thank you, Mr. Chairman. I presume that one of the 

reasons that the Federal Reserve made an error on setting the interest rates too low for such a long period of time and other central 

banks followed suit is because in the 1930’s, there had been a real 

problem with the Fed setting interest rates too tight. Frankly, I 

think what transpired is again—the Fed thought deflation was 

going to be a problem and as a result they set negative interest 

rates and they set those negative interest rates 4 years running. 

I asked Mr. Alvarez this question. But I really believe that was 

part of what created the balloon in asset prices and I suspect you 

would agree with me. As I had said, von Mises—his study on business cycle theories showed the propensity of central banks to do 

that. But what worries me most right now is a study in 1999 by 

the Richmond Federal Reserve that 45 percent of all liabilities in 

the financial system were backed by the Federal Government. And 

it is the moral hazard aspect of this and the fact that we have compounded this going forward by bringing the Fed in deeper and further in terms of that moral hazard challenge. And I would like your 

comment on that. 

Mr. WOODS. Certainly. On the issue of deflation incidentally— 

and that was the reason—the fear of deflation, that they had to 

keep interest rates very low. Ben Bernanke, before he was Fed 

Chairman, was the one who gave a speech around 2002 warning 

of deflation and he spooked the markets because no one else was 

talking about deflation at that time. So I think that was a hypedup concern. But the moral hazard problem, I think, is the key problem. Because how do we move forward from here plausibly claiming that, oh, listen, we bailed you out up to this point. But if you 

fail tomorrow, that is it. How can this be taken seriously? And unVerDate Nov 24 2008 17:39 Apr 09, 2010 Jkt 054871 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\54871.TXT TERRIE
55 

fortunately, an institution like the Federal Reserve system—when 

I get a question like this, I, unfortunately, have to delve into an 

aspect of the question that I have somewhat forsworn to discuss. 

But the Fed, in effect, institutionalizes this moral hazard problem because there is no physical limitation on the amount of money 

it can create to bail somebody out and everybody knows that. Secondly, there is at least the possibility that there existed the Greenspan put. People knew Greenspan is not going to let things go 

under. He comes to the rescue of long-term capital management 

1998. Do you think some of these firms would have been in the 

shape they were in by the time they started collapsing if long-term 

capital management had been allowed to collapse, and they realized the game is up, we actually have to run sensible enterprises 

it is worth asking why are equity ratios so low in the financial sector. 

We are being told we need higher capital requirements and so 

on. That may be a good idea, but we should ask the more fundamental question: Why are they so low? Why aren’t they so low in 

the shoe industry or the shellfish industry or the hat industry? And 

the answer is they don’t have lenders of last resort that have the 

ability to bail them out. The International Monetary Fund acknowledged this in April 2008, in a report, they said that the financial sector is depending much too much of its liquid problems on 

expected intervention by the monetary authority. This is a very significant problem especially because in the wake of some of the decisions that have been made, the too-big-to-fails have become even 

bigger. So we have not solved the problem. The problem is hanging 

over— 

Mr. ROYCE. You have actually compounded it. Because if we give 

the Fed, then, a secondary responsibility which is to try to overcompensate for businesses that might go bust, they might do that 

by setting the interest rate too low, long-term capital management 

being a case in point. So the more of this responsibility you put on 

their shoulder, the more you lessen their focus on keeping a stable 

monetary unit and keeping the stable monetary unit long-term is 

the thing that is going to bring about the most market discipline, 

the most long range planning, the least amount of waste in the system in terms of destruction because you don’t have a boom/bust 

cycle. 

What we are doing is compounding the cyclical, the depth of 

those cycles basically. Would you concur with that? And I want to 

make one last point. I think that getting Congress involved in this 

would sort of compound the problem. Whether it is on the issue of 

unemployment or whatever good cause we are trying to involve 

ourselves in, the likelihood is that we are going to further that extension of boom and bust in the cycle. 

56 

Mr. WOODS. There is no question about it. This is how Hayek 

won the Nobel Prize in 1974, for arguing that if you set interest 

rates artificially—well, look. Interest rates aren’t arbitrary. And if 

you set them artificially, you are just opening yourself up for massive errors by everybody, businessmen, investors, consumers. And 

that is exactly what has happened to us 

The CHAIRMAN. The time has expired. The witness is excused. 

The hearing is adjourned. 

[Whereupon, at 12:24 p.m., the hearing was adjourned.] 

(57) 

A P P E N D I X 

September 25, 2009 

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