 This hearing will come to order without objection all members opening statements will be made a part of the record The chair notes that some members may have additional questions for the first and second panel of witnesses Which they may wish to submit in writing Without objection the hearing record will remain open for 30 days For members to submit written questions to these witnesses and to place their responses in the record this morning We're holding hearings on audit the Fed Dodd Frank Q e3 and Federal Reserve Transparency I will yield myself five minutes for opening remarks Transparency of the Fed has been an Issue that I have been working on for many years I consider it very very important and we have been making some progress on this back in the 1970s There was a major effort made to get more transparency of the Fed But unfortunately it actually backfired and gave more protection to the Fed from any inquiries made by the Congress one thing I'd like to make clear is my efforts to have more transparency of the Fed isn't equated to that of wanting Congress to manage day-to-day operations of the Monetary of monetary policy quite frankly I I think managing of the monetary policy should be more involved with the free market free market of interest rates rather than anybody believing they can manage that from a day-to-day viewpoint frequently it is said that the Independence of the Fed must be protected at all costs and I usually think once there's an emphasis on Independence of the Fed it usually means the secrecy of the Fed and it's quite a bit different but The Fed hides behind this independence so there's no political influence, but I think more people now are starting to realize that The Fed isn't truly independent from political influence because indirectly and sometimes more directly it is involved in political decisions or at least Private and secret decisions made to serve some political interests The Constitution is rather clear on if anybody's to have any oversight it would be the Congress rather than the executive branch the Ability to do this of course has been hindered The Congress created the Federal Reserve with the Federal Reserve Act of 1913 and therefore obviously the fit the and obviously the Congress has something to say about it Not only did they create the Fed, but they've changed the rules they can the Congress has passed laws Giving instructions to the Federal Reserve so clearly the Congress has responsibility of oversight of the of the Federal Reserve I Think it's very interesting that one of the arguments for independence is that We can't allow the people to know what's going on with the banks That if all of a sudden we knew that a bank was having a problem That this would be bad information for the people to know about and in and then that is used as an excuse to prop up Certain banks and make sure bailouts occur and that there's a lender of last resort and there's no no confusion Or otherwise no correction that might be Be necessary, but in in many ways The Fed performs a function exactly opposite of what the SEC is supposed to do the SEC is a regulator That's supposed to go in and and look at the books and to follow some rules So the people know what's going on And get information out, but it seems like to me at least that the Federal Reserve does Exactly the the opposite the significance of monetary policy is really the overriding issue about The Federal Reserve and what's happened since 1913 and actually what's happening today? Because we're in a midst of a major crisis And there are many of us who have come to the conclusion that the business cycle is very much related To to monetary policy So if the policy if the business cycle is related to monetary policy This is a vital interest to should be a vital interest to all of us if if we connect the to the Federal Reserve and the business cycle then we see that recessions and depressions are a result of the business cycle first you have the boom and you have to have the correct you have to have the bust the other important relationship of the Federal Reserve to what Congress does and Too too long. It's been actually symbiotic the The Congress has been negligent and oversight, but they've been very complacent about deficits being accommodated if the Fed was not so Accommodative and would and always buy the debt and keep interest rates artificially low There would be a lot more restraints on the Congress, but as long as Congress Wants to spend money and they don't want to raise taxes. That's not popular and borrowing becomes difficult Then there's a better way from their viewpoint to do it and that is just to allow the Fed to create money out of thin air which For those of us who believe in less government is better than more government Whether it's warfare or welfare We see that the Federal Reserve has a has a strong influence in allowing our government to grow so I am very pleased to Chair this hearing today, and I'm very pleased to know that We are making progress. We didn't get a full audit last year, but we did get an audit Due coming out of the Dodd-Frank bill. We did get a lot of more information and today We're going to receive more information as as well as the court cases that have come about So compared to even four years ago a lot of progress has been made in the right direction But from my viewpoint we have a long way to go so I have concluded my opening statement and do I have another member would like to have an opening statement Thank you very much Okay, we'll then go ahead and start with our first panel First panel is Miss Orris Williams brown who has spent her 21 year career in civil service at the GAO office She is currently the managing director of GAO's financial markets and community investment team Her portfolio of work includes banking securities futures and insurance issues Most recently she has been responsible for leading much of GAO's work on the financial crisis Treasury's troubled asset relief program the Federal Reserve system and its emergency lending programs and regulatory reform Miss Brown received her MBA with a concentration in finance from Virginia Tech and I Will recognize miss brown for her testimony Thank you Chairman Paul ranking members of the subcommittee I am pleased to be here today to discuss our recent report on the Federal Reserve's emergency programs as You well know this study was required by the Dodd-Frank Wall Street reform and Consumer Protection Act It is the first comprehensive assessment of the Federal Reserve's use of its emergency authorities under section 13-3 of the Federal Reserve Act in response to the recent financial crisis It also covers a number of programs that were carried out under sections 10b and 14 This morning. I would like to briefly highlight a few of our findings First we found that the Federal Reserve and its emergency programs were subject to a number of internal and external audits None of these audits found material weaknesses and when issues were uncovered the Reserve banks generally address the deficiency in a timely manner However, we did find that some operational audits had not been completed until the emergency programs had been operational for over a year Second the New York Fed was the primary player in executing most of the emergency programs Authorized by the Board of Governors and the Open Market Committee However, one program the term auction facility was executed across all 12 Federal Reserve banks through their discount window operations To implement and operate the various programs the New York Fed used over 100 vendors to provide a variety of services Ranging from legal services to asset management We found that most of the contracts were awarded non-competitively And they were not Recompeted after the period of exigency had passed For a significant portion of vendor fees Reserve banks were reimbursed by program recipients or fees paid from program income Third we found that while the Federal Reserve took steps to manage conflicts of interest Opportunities exist to strengthen its policies for employees directors and vendors During the crisis the New York Fed expanded its guidance and monitoring for employee conflicts However, while the crisis highlighted the potential for reserve banks to provide emergency assistance To a broad range of institutions The New York Fed had not yet revised its conflict policies and procedures to more fully reflect potential conflicts that could arise With this new expanded role Fourth we looked at the Federal Reserve's risk management practices We found that it took steps to mitigate the risk of loss such as requiring collateral amounts beyond the loan exposure for the early programs And accepting only highly rated assets as collateral for some of the latter more novel programs For actions to assist individual institutions it negotiated specific protections Over time the New York Fed expanded its risk management capabilities and started to manage risks across all programs However, we found that neither the reserve bank nor the board of governors tracked total potential loss exposures across all emergency programs Finally, we found that while the board of governors took steps to promote consistent treatment of participants It lacked guidance and documentation for some decisions For example, reserve banks lack documented procedures to guide decisions about restricting or denying access to the programs We made seven recommendations to the board of governors to strengthen policies for managing non-competitive vendor selections conflicts of interest risks related to emergency lending And documentation of emergency program decisions In response the reserve board indicated that it recognized the benefits and would strongly consider how best to respond In closing, I would also note That many of these programs were established during the height of the financial crisis And little public information was provided Over time the board of governors in New York Fed increased the amount of information provided to the public And going forward the Dodd-Frank Act requires even greater transparency and accountability for any future actions Mr. Chairman and members of the subcommittee This concludes my oral statement and I would be happy to answer any questions at this time. Thank you Thank you very much. I will yield five minutes to myself for questions Overall, having done this audit and been involved Was there any one thing that you were more frustrated with or was there any obstacles or misunderstanding or the law was confusing Or was this a pretty Clear-cut responsibility and there weren't that many problems. How do you how do you look at it in general? In general, I would say that the Act laid out a pretty clear level of expectation for us in terms of what was expected the programs that we were to cover And exactly what aspect of the program and the operations of the programs that we were supposed to cover So I would say it was fairly straightforward Okay, and this was a one-year audit. You just have to perform this one time. Correct now Would would there be much of a problem if uh, if we were doing this every year? As as far as Accomplishing what you've we've you've done is this what kind of a task is this? Well, this particular audit while it was fairly straightforward. It was An enormous undertaking given the number of emergency programs involved as well as the other programs that were specifically delineated You know going forward if One we'd have to keep in mind kind of the current Um Structure that we have around our authority to perform audits as you know Dodd Frank includes in section 1102 Some additional authority for us to look at any future credit facilities that the Fed may establish and also certain Open market or monetary policy activities that are delineated in in the Dodd Frank Act So if we were asked to do those we would you know look at any particular request in turn and approach it Very much the way we approach this and from your own experience You've not had to look into the Federal Reserve In the way you did this time. Is this something rather unique for your experience? Yes Many say that it is unnecessary to audit the Fed because they are already audited annually by an independent auditor These audits are of the Fed's financial statements and became a legal requirement just in the late 1990s Can you describe to us the difference between these financial audits that they'd like to say whether they're all inclusive and we know everything Versus an audit conducted by the GAO. Could you describe the difference? between the two yes um GAO actually also does financial audits, but we do performance evaluations and the audit that we did in um and issued in July of 2011 Falls under the um program evaluation performance audit arena And the biggest difference is that we in this were asked to look at specific operational Issues we were asked to look at the operational integrity Issues like internal controls over the operations of the programs We were also asked to look at how the programs were implemented and stood up financial audits tend to focus on if Whether or not the financial statements are being fairly and accurately presented and the controls around the financial reporting So it's it it tends to be kind of much broader and also more in-depth Along that line. I want to follow up with A similar question. The Dodd-Frank GAO audit has been described as a procedural audit It seems that most of the analysis was looking at the protocol and guidelines in place for the various emergency lending facilities What do we know about individual transactions? How were they conducted? How collateral was evaluated and all Who all had knowledge and access to the facilities and and those things in general Are they included in the GAO's audit or were they not part of the directives? given by the Dodd-Frank Especially on the individual transactions and who knew about them and why they occurred Well, we were specifically asked to look at the the operational aspects of the program But that include looking at certain individual transactions specifically when it came to assistance to individual institutions But in terms of looking at the broad-based programs, we did look at eligibility requirements. We looked at Who the largest users were of the particular programs and we also looked at how the decision Was made from the perspective of you know, who approved the particular emergency program. Was it the board of governors? Was it the open market committee and then how the particular reserve bank Implemented the action that had been authorized by the board of governors or the FOMC I thank you and my five minutes has expired. So we'll move on To the next member and this is the gentleman from Missouri Blaine luka mower five minutes. Thank you, mr. Chairman One of the things that's kind of concerning to me is the fact that All banks credit unions thrifts what have you Or all they have some entity that provides oversight over them And yet the fed which is the central bank basically, I guess you would say of our country has very little if any oversight over it You know in some of the things that you say here the things that were not Because of the prohibitions you were not able to go into I think it's kind of Interesting. Where do you think we need to draw the line on this? GAO's position is that you know, this is a policy decision and wherever the line is drawn And the bar is set for us to do whatever action we will do what congress asked us to do Okay Along the line with regards to the emergency loans That were done during the height of the Situation we had in this country You say in here that Fred reserve banks required bars and reserve programs supposed collateral and excess of the loan amount programs that do not require Pledge assets With high ratings, etc. Etc. Did you see in the way that they handled the The loans was it in normal banking terms? In other words, did they did they have the normal sort of Requirements for collateral excess over the loan they made normal repayment terms or what did you see there? We we did look at the Security and collateral procedures around loans that were made and we we evaluated the process that they had in place And we found that they did have Um, you know controls around those that they did have requirements that certain loans be over collateralized And in other cases there was a requirement that the collateral posted Um be Highly rated so there were certain controls that were built around the loans that were being made Did you see anything there that was of concern to you? Um We didn't see anything that that raised a major concern We did point out that some of the internal audits that had been done had raised Some questions around increasing the the controls around the collateral and we did look at The extent to which those had been addressed and we found that At some point, you know when an issue was raised the bank would take steps to improve the controls that That were in place have all these loans been paid back For many of the broad programs they have been there are outstanding loans for the three Maiden Lane LLCs Related to the assistance to Bear Stearns and AIG Okay, the point I'm gonna try to get to here though is they haven't all been paid back correct your your audit Authority is over with is that correct correct therefore at this point There is no audit authority on those loans that have been paid subsequent to your to your audit or those that are yet to be paid Is that correct? for In all cases except for any that involved Assistance to individual institutions Okay, do you think it'd be a good idea if we went back and had a requirement to audit those Whenever they're all paid off to see what's everything was done according to sound financial tenants It's it's something that if we were asked to do we would definitely do that. That's policy decision, right? Yes. Okay With regards to The open market operations of the Fed One of the things that says here is that you are they are not required to disclose their operations until Two years after they take place um, how do you how do you get a hold of information that's uh Pertinent that's that's time sensitive that can we can actually get a good job of seeing what everything's going on here If you can't do it within a a two-year time frame that seems almost Beyond the ability to sort of implement any sort of controls or corrections Well, we would note that in the audit that we did that was issued in july It was done in many cases less than a two-year time period Okay, one more question real quickly with regards to the The swap lines of things that they have with foreign banks Were you able to do anything at all with with uh oversight or that were you able to look into any of the the Activities along those lines. We did that was one of the specific programs Listed under our authority and what did you thought frank? We basically looked at how they were structured. We found That the fed had engaged in a number of swap line transactions with with foreign central banks and um The biggest takeaway was that once the the fed engaged in the swap with the foreign central bank Any activity of the central bank? The foreign central bank was really from the fed's perspective. That was the central bank's Responsibility and the the foreign central bank assumed any credit risk from the activities that it engaged in The chairman there was one more question Would you see any risk to the fed with that with that way that's structured right now? the um Well, that's one program that remains open and the authority for that program is open through august of 2012 it was one of the programs that been had been extended and um, you know as with swaps, um, there's You know currency risk associated with with with currency swap type of transactions Okay, I see my time's up. Thank you, mr. Chairman for indulgence. Thank you Now a yield five minutes to congressroom and hayworth from new york Thank you, mr. Chairman and thank you for conducting this hearing. Thank you, miss. Williams brown for being with us um There's a notable statement in the gao report that some federal reserve board decisions to extend credit to certain borrowers were not fully documented Um, and I was wondering if you could elaborate on that. What sort of documentation would you like to have seen? You know, was there an explanation as to why the documentation was lacking well In in the area of documentation kind of prior to dod frank there wasn't an explicit requirement for the fed to To document its decisions So from an audit perspective that often presents a challenge in determining exactly what happened So that requires us to have a number of conversations with the relevant players But what we noted is with the programs that were generally broad eligibility requirements And institutions that were generally considered to be in good financial condition were able to participate in a particular program But to the extent that there were exceptions that didn't necessarily appear to coincide with the particular process in place We had to have conversations to find out kind of why things happen One example is with the commercial paper lending facility And aig subsidiary was allowed to participate in To continue to participate in the facility Even though they no longer met the the new requirements and that is that they had been an active Participant in the commercial paper market, but they were still allowed to participate in the facility Is there further work on going to determine why that was allowed to occur or No So that now lies with I'll say I guess here too And we did make a recommendation to the fed kind of going forward that if they were To engage in credit facilities or any emergency lending in the future that it's important to Document decisions and the Dodd-Frank act now has a reporting requirement So we pointed out that in order to fulfill that reporting requirement in the future There's documentation that has to go along with the decision making In order to And presumably to encourage sound decision making so that we're not Doing things that that don't make sense fiscally Yes that and to be able to then report to the congress, you know, what was being done and why Well, thank you. Ms. Williams Brown. I appreciate that. Mr. Chairman. I yield back the remainder of my time And I now yield five minutes to the congressman from Arizona. Mr. Schweiger Thank you, mr. Chairman and it's ms. William Brown Part of this is actually and my good friend from new york was almost touching on parts of this First on on the emergency facilities Were you able to take a look at how well documented? The requests were the Systemization of the decision making and part of where I'm leading on this is just sort of your opinion, you know when you're playing auditor If we were to have a another hiccup Do they have mechanical rules and steps that that are consistent? What did you see? Well at the retrospective audit There weren't requirements for them to document Specific decision points So from that perspective it required us to go back and attempt to reconstruct How decisions were made the going forward there there are new requirements In terms of being able to report out That should help provide some additional structure around it And that's one of the things that we also spoke to in some of our recommendations I've heard some discussions about even before of some of the new requirements But do they seem to now have been adopted in sort of the if you and I were to lay out a flowchart and saying here's our decision making process With you and I also understanding this may be a process that sometimes has to be done very quickly correct But it also helps to know what Checkboxes you're going through saying okay, we have this we have this we have this and From what you're seeing have those documentation requirements the new ones been built into the system Well, I will say since july we haven't gone back to Update the status of the recommendations that we made so I can't say if they have Addressed the recommendations that we made for example for a better documentation process So that's not something i'm in a position today to say that they have or have not done those types of things Okay, mr. Chairman miss willing brown um With that because where i'm sort of hunting is how did they document what assets were being pledged? um future forward um What was being swapped and and how well that was sort of locked in saying yes You're pledging this and when once you've pledged it you can't go and touch it anywhere else And we also have a proper mechanics telling us any exposure like are there any sort of? um Where these assets may have also lent out their Value to to other pledges I'm just i'm trying to understand the decision tree, but also the quality of the documentation on assets pled now in terms of um Kind of pledging collateral and tracking that we did look at the control process around the the collateral process And we did specific drill downs on two of the facilities that um That borrowers were able to pledge a wide variety of collateral for a single loan And we did a drill down to look at the collateral that was pledged and we also did some independent um Evaluation and testing to make sure that those controls around those were operational So there was a process around that when you were looking at at some of that Did you find some of the assets didn't really Ultimately the market value add up to what they were put into in the pledge We well we looked at really kind of the pricing of the collateral And we found in a small percent of cases somewhere around two percent that there was some discrepancy in the the price of the particular cap the Collateral that we tracked versus what was included in the data that we had gotten from the Federal Reserve But we did not find any type of systematic bias one way or the other in terms of how that Um collateral had been priced, but but only about two percent. It was a fairly small percentage. Yes I'm surprised for take and would some of that have been mbs A mortgage backed securities right because the you know way you would price it Was it I think it was it cut across a variety of the types of collateral that had been posted Last one and i'm partially doing this from writing and see if i find in my notes And this one may be almost asking more of an opinion Inspector general for the Fed I think has also been given additional duties to consumer finance protection bureau They're almost wearing two hats Even though they're now separated Any opinion on does that mechanically work? That's not something we've specifically looked at So i'm not in a position to offer an opinion. No gosh darn on that one. I'm mr. Chairman yield back my time. Thank you Thank you gentlemen. I yield five minutes now to the gentleman from michigan. Mr. Heitznicka Thank you, mr. Chairman and I I uh, I just want to appreciate uh, or want to express my appreciation for you Holding this hearing. I think this is very important. I appreciate your time Coming in as well and and I won't plan on using this full five minutes, but I am struck by the theme that we're hearing of A need for oversight and I don't want to put words in your mouth But that's certainly it's sort of the tone that i'm that i'm catching that this is a good thing that we that we should That has happened. I think it's up to us then to decide whether this is something that we should continue It seems to me we should I am curious a bit about if you could unpack and I apologize if you had To step out for a phone call, but maybe you touched on this, but I wonder if you could unpack a little bit about what some of the lending facilities were used by by branches and subsidiaries of foreign banks and and Were you really able to determine why several of those emergency lending facilities were primarily used by foreign institutions? And I wonder if you could talk a little bit about that We did look at the largest users across The facilities and we did find that there are certain facilities that tended to be used by the The branches and agencies of foreign banks And in conversations and following up with the federal reserve about the reason for that We found that usually the largest lenders of facilities were driven by kind of the composition of the market So if it's a market that there were major Major foreign banks that had branches and agencies in the us they would have been as likely as a us bank to Tap a particular facility And so that wasn't necessarily a region when you're when you're saying that could be a product line or product line or a particular Market that they were active in because many of the broad-based programs Were aimed at a particular disruption that was going on in a particular market Commercial paper some of the money market Um Mutual funds had also experienced problems. So could you characterize sort of the ratio? Of domestic versus the foreign It really varies by program and I'd be more than happy to um, you know, provide a Breakdown for each facility for the record. That would be great. How many facilities is using the term facility How many facilities are there how many breakdowns do you think that would be? There were there were I think it was somewhere in kind of the 10 to 12 range. Okay All right, we appreciate the follow-up on that. So thank you. Absolutely. Thank you, mr. Chairman. Appreciate that. We yield back Thank you. And now I yield additional time for a follow-up question to the gentleman from Missouri, mr. luka maher Thank you, mr. Chairman. Um, I'd like to follow up just a little bit more on the swab line discussion we had a minute ago Um Can you tell me how many times the the line has been used or is it just beyond just You know number of times per day or has it just been only three or four times in the last six or eight months? Um I'm I'm not sure that we tracked it by the number of times used but we focused on the number of Foreign central banks that were permitted to participate in the swap line And there it would have been through The july timeframe Do you have an idea of how many times that was? I don't We had the chairman in here not too long ago and he indicated that there was almost zero activity Well, I will say that when we issued our report as of the end of june The balance on the swap lines was zero. Okay at that time So they had been used and repaid looking at those transactions Did you see anything in there that would pose a risk to the fed or therefore our taxpayers? I think the the potential for because the fed would be swapping dollars For a foreign currency with an agreement that the foreign central bank would Would reverse the swap at the same rate that the other to the extent that rates that move there's There's a potential risk built into did you see where the it's a pass through from other existing banks over in europe Through the central bank there or was it just a direct swap through the european central bank? Well, it was once the swap happened with the particular central bank that the fed engaged in the swap activity with The federal reserve didn't track what happened to Those dollars once they were in the hands of the foreign Okay, so basically there basically there's a firewall then between the transaction and wherever else those monies would go to Those other dollars would flow to right is that is that a fair statement? Um I guess i'm pausing on the firewall, but there there is definitely a separation. Yes There's no there's no tangible liability exposure to us from one of the other banks in europe That's going to be passed through the european central bank. I guess that's a better way to The central bank would would assume that risk. Okay, so there basically then is no other Risk that we've assumed the feds assumed from those activities right beyond the swap Okay, and the only risk that you see there is just the normal currency activity Of the daily ups and downs of the of the value of the currency itself Or is there other other things in the transaction? Well, there could potentially be others But that was the one that kind of immediately comes to mind the biggest risk um I would say that that's the one that immediately comes to mind for me And I do have a total on the number of transactions. Um 569 Those were that's how many transactions there were between what time for it? Um, this would have been from the beginning of the program through on june 29th 2011 really okay Uh one more quick question. Uh in your in your report you indicate that there is The geo found that conflict of interest policies could be strengthened Can you give an example of where there's a conflict of interest that you found that there's a problem or exposure or concern? Well, we we found a number that raised, um Issues they raised an appearance of a conflict um, and one had to do with Uh senior federal reserve bank of new york officials They held stock um in some of the institutions that had received assistance aig was one example Did you see a pattern with individuals or with particular companies particular entities like through aig or other Companies or other entities that were out there that they were trying to work with or I wouldn't say we observed any type of um pattern We observed with the vendors that there were situations that the that the federal reserve bank of new york for example could have taken additional steps to strengthen their um Their management of conflicts of interest that may have existed existed within vendors Um and done additional oversight of what the vendors were actually doing to make sure that they weren't exposed to conflicts Okay, very good. Thank you, mr. Chairman. Appreciate the second second round Thank you, and I now yield uh for follow-up question to mr. Schweikert from arizona And forgive me. Um, I just want to make sure I was listening carefully um to congressman lucamire. Um on Facilities that were with foreign central banks Was there a currency risk on when the Assets were moved back Well that that issue really comes up on the the dollar swap lines because that's actually a swap of um us dollars for current foreign currency with the agreement to reverse the swap It would be it would be an unusual instrument to unwind it back to You know the the value of the previous swap that there'd been movement in the currencies that's Sort of defeats the purpose of it Well, I mean it's it's kind of the nature of a swap That you agree to exchange the currency and reverse it at a particular price at a particular date in the future Okay, so there there was from what you were seeing is there was always a pledge on The the value at the end For the dollar swap lines only yeah, no that might be the only one I was interested um second of all, um, and I know this is a little on the annoying side, but um if you would Have one of your staff reach out to our office sometime in the next couple weeks We'd love sort of in writing to be able to chase down As you were saying that it was two percent that you saw that a pledged assets that you thought sort of may have been outliers And this was one of those occasions I have to go through my file cabinet and find an article from a couple months ago And I think was talking about specifically um Private label nbs that may have been pledged that may have been much further In a dispute of what its true value was And I'm just trying to get my head around having sort of read one thing and now in testimony Making sure I'm using the same definitions there Well, and it's not only an issue of the same definitions But this is something that could vary from facility to facility And my comment was specific to two credit facilities, but you know, this could actually be the case and one of the others It absolutely would be that way. Yeah, I mean it would absolutely be that way If there was 500 some different ones as I think I just heard you say For the transactions for the dollar swap lines. Yes Okay, that Last one is also as long as we're asking you to throw something into notes Um So that inspector general Um Comment before I know this really isn't your area, but I'd love someone if you know if there's a policy statement or somewhere Um In the agency in regards whether this really works to Have one inspector general sort of doing both the consumer On finance protection and the fed even though they now wear very sort of separate hats Okay And with that mr. Chairman I yield back and thank you I thank you Does anybody else care for any follow-up questions? If not, um I want to thank the witness for appearing and also without objection Your written statement will be made part of the record and you are now dismissed and the second panel may have come to the table Thank you We will now receive testimony from our second panel Our first panelist dr. Robert Arbach is professor of public affairs at the lbj school of public affairs at the university of texas In austin he was an economist with the house of representatives financial services committee Formerly the banking and finance and urban affairs for 11 years He assisted chairman henry rois in the 70s and the 80s and chairman henry gonzalez In the 90s with oversight of the fed spanning four fed chairmans ferns miller valker and green span He is the author of the book deception and abuse at the fed He received two master's degrees in economics one from the university of chicago and one from rusevelt university under Abba lernher He received his phd in economics from the university of chicago where he studied under milton freedman Our second panelist is dr. Mark calabria Who is the director of financial regulation studies at the cato institute? Prior to joining cato in 2009 He spent seven years as a member of the senior professional staff of the senate committee on banking housing and urban affairs Where he handled issues relating to housing mortgage finance economics banking and insurance Dr. Calabria has served as deputy assistant secretary for regulatory affairs At the department of housing and urban development and has been a research associate with the u.s. Census Bureau's Center for economic studies He is a frequent contributor to the new york post national review and investors business daily And frequently appears on cnbc bloomberg fox business bbc and bnn he received his phd in economics from george mason university I would like to Now recognize this second panel and also Under uh, you name is consent your written testimony will be placed in the record. So I recognize mr. Arbaugh dr. Arbaugh Sorry about that Thank you very much german Ron paul and the members of this committee I'm honored to come back here where I worked for 11 years Uh One thing you left out. I also worked in the reagan administration saying the same things in between the periods I worked here at the treasury department Uh, I want to talk about the Transparency at the fed The fed is the powerful central bank of the united states that controls the money supply Regulates the banking system and since 1962 makes loans to foreign banks Without congressional authorization The historical record of federal reserve officials blocking transparency An individual accountability including destroying source records of its policymaking committee since 1995 Is clear I want to especially think Uh, german ron paul and senator bernie sanders for finally Getting some kind of an audit at the federal reserve in the dod frank act in 1976 When I was here. I assisted henry roiss in putting up a An audit bill of the fed The fed immediately amounted mounted a huge Lobbing campaign Using the bankers that it regulates To come to washington and go into all the offices here and stop the audit Uh chairman roiss went to the floor of the house later when we got direct evidence Of how the fed Use their offices and their facilities to organize the bankers they regulate To come to the congress and lobby Finally the bill Was a couple of years later 1978 was passed down the hall at the government operations committee With two glaring No audit parts of the bill One is anything to do with monetary policy or international transactions at the fed Well, let me just talk one moment about those two areas in the monetary policy area There are tremendous Opportunities to make billions of dollars on inside information From the many leaks of fed monetary policy Which I helped in the committee investigate For for many years You can Let me just give you one little taste of it First of all greenspan said After a number of leaks when the newspapers were publishing what they had said the previous day And their secret meetings that were beginning to look like a bunch of buffoons They had at those secret meetings at the kansas city fed where I used to work Central bankers from bulgaria china chex republic hungary poland romania and russia attending and listening to interest rate Information that they would not give the congress at that time And Finally The federal reserve Decided That they would Not Like to have any more minutes Public of their central policymaking committee that was arthur burns in 1976 from a law then that was Being passed government in the sunshine law And a suit from a student At a university in washington dc So the fed voted then 1976 10 to 1 vote That they would no longer have any transcripts of their central policymaking committee And It's a 10 to 1 vote And the 17 year lie began Uh Finally In 1992 I came back for the second time and I spoke with the great henry b as they call him in his district in san antonio How could it be That the most powerful central bank in the world had no transcripts of its meetings that they used to send out what happened to them So, uh Mr. Gontales had all the fed presidents come all but two showed up Greenspan sat in the middle right where i'm sitting Members of the board of governors on each side and they misled the congress We put a lot of heat on them because they were federal witnesses and a few days later the cleveland fed broke And said well they had had a meeting four days earlier where they Decided how they'd mislead the congress And um, I just have it One one uh person at that meeting the staff person a very good staff person who used to work with me at the Kansas city fed But he was assisting greenspan said the chairman is not highlighting these transcripts. We're not waving red flags And when congressman morris henshey had asked him at the hearing right here, do you have any records and he said just Just some notes we keep Well after that Greenspan sent a letter over here and said well actually this is 17 years later We have those transcripts And I took a group of republican and democratic staffers over to the board of governors found them right around the corner from greenspan's office neatly typed And uh, so they decided then that they'd start Issuing the transcripts again after a five-year lag much too long for timely accountability and After I left the committee Went down to texas I read that they had decided in 1995 To shred the records of the federal open market committee They had been kept those transcripts had been kept and sent to the national archives But they decided to destroy them. So I wrote a letter To allen greenspan asking why they're doing that and his vice chairman Very good person inside the fed. These are good people. They just have bad policies Uh, donald kohn who's worked there for many years and became vice chairman started at the kansas city fed He wrote to me. Yes, we've decided to destroy The the transcripts of our meetings, but we think it's legal um I just want to go through a few other things on the audits So you can get an idea Of how bad the audits have been of the fed just two little points one is The los angeles branch of the kansas city fed You can ask me questions about it when we found out That the auditing system there was corrupt And I took an excellent GAO team I was a liason went in there and found that the system was completely corrupt And greenspan admitted in a letter to the committee that they knew that the employees of the fed had Stolen at least a five hundred thousand dollars in the previous 10 years from the vault system of the 12 banks and One other thing and then I'll quit The airplane fleet of the fed 50 plus airplanes The audit there was a joke. There was no audit the The people running the fleet in boston used to laugh about it and they appeared here Mr. Castle allowed them to come and they were very courageous and they talked about it right in the committee room here and Mrs carol and meloni congressman meloni helped in In investigating them That was no there was a completely corrupted thing It was typified by their backup plane the fed paid for in teter borough airport that didn't exist most of the time Now what that's all I want to say if you I have two other points One is about paying off all the economists throughout academia An investigation of Henry B. Gonzalez and what I consider meld practice The fres the present policy monetary policy of the fed that was begun In october 2008 that's caused a lot of unemployment in the united states Thank you We'll go to dr calabria now Chairman paul distinguished members of the subcommittee. I thank you for the invitation to appear today's important hearing As the subcommittee is well aware the events of 2008 witnessed not only unprecedented disruptions to our financial markets But also extraordinary responses on the part of our financial regulators and central bank No entity was more deeply involved in the federal reserve system, particularly the new york federal reserve Yet the fed has consistently and repeatedly resisted efforts to bring accountability and transparency to its actions Congress and the public repeatedly warned that if details of the fed's actions became public Further panic would ensue in our financial markets Yet when yet when that information such as aig's derivatives counterparties finally did become public disruptions were minimal or non existent Despite some notable attempts by the fed to increase its communications with the public I believe given its track record the public cannot rely on the fed to voluntarily provide us with sufficient information to monitor Activities and judge the effectiveness of its actions And while the requirements of the dod frank act in relation to auditing the fed's activities aren't important advance They far fall too short at providing sufficient oversight of the federal reserve What auditing has been conducted so far has been focused on the fed's response to the crisis Accordingly much of the audit requirements in dod frank have something of an historical feel about them However, it is not enough just to get history right although. We're lucky if we do that But also to ensure that future mistakes are avoided I can think of few areas requiring as much mistake avoidance as monetary policy The fed's role in helping to create the crisis Via its easy money policies in the aftermath of the dot-com bubble and the events of 9 11 remain largely Uninvestigated by congress if we truly wish to end financial crisis is that I believe it's absolutely essential That congress receive a full and objective evaluation of the fed's role in fostering the housing bubble Particularly as it relates to monetary policy decisions between 2002 and 2005 Disagreement as to the appropriate stance of current monetary policy. I think also demonstrates Congress's need for objective independent analysis of monetary policy Some might object that a gao audit of the fed subjects the fed to political pressure I think that such an objection ignores the simple fact that gao is not a political organization As mentioned, I served as staff on the banking committee for a number of years I can say through all of my interactions with the gao. They're independent. They are unbiased. They're non political I have not always agreed with the conclusions of gao, but I have never felt that any of those agree disagreements Were the result of politics or bias I think the subcommittee should also keep in mind that gao exists for a very simple reason That no member of congress are their staff are fully knowledgeable about the functioning of all the various government agencies gao simply exists to inform I would argue that there are few areas less understood than monetary policy and macroeconomics Hence, I would argue there are a few areas more in need of an audit than monetary policy and economic and macroeconomics Again, the purpose of gao here is to try to provide some information so that members can more actively engage I think and more effectively engage in oversight of the federal reserve Another objection to the gao audit of the fed is that such would compromise the fed's independence and subject to political influence I think such an objection confuses the very nature of fed independence The fed's authority to regulate the value of money is one that is delegated from congress As congress can and has legislative changes to the fed It should be beyond a doubt that the fed is not independent of congress It's quite the opposite as a creature of congress and congress has every right In that avenue to interject and can and regulate the activities of the fed itself Setting aside the debate over the desirability and legitimacy of so-called independent agencies It should be clear that their independence in any operational sense is supposed to be from the executive branch Not from congress It should also be clear however that in recent years the federal reserve has coordinated its actions quite closely with the treasury department In my opinion eroding any independence from the from the treasury The revolving door both at the political and career levels between the federal reserve and the treasury department further undermines the fed's operational independence I believe a gao audit would help shine a light on this relationship Actually helping to insulate the federal reserve from continued interference by the treasury department Again the federal the dod frank act has made important advances in bringing transparency and accountability to the federal reserve Unfortunately, it falls short in allowing congress and the public to truly gauge the effectiveness of the federal reserve In order to improve federal reserve transparency I would suggest that congress mandate a regular audit of all federal reserve activities, including monetary policy Such audits could be performed in a manner sort of minimize the disruptions to any ongoing deliberations of the federal open market committee For instance, these audits could be kept confident confidential for a short about a time six months a year That's certainly something that could be done not to try to unduly influence ongoing activities But again, those audits should be made public at some point I think it's also important to emphasize Evaluating the effectiveness of any government agency has made all the more difficult when that agency faces a variety of competing and sometimes conflicting objectives If the federal reserve feels it's free to abandon price stability In order to achieve other objectives such as rescuing the financial industry or misguided attempts to influence the labor market Then I believe the value of an audit may potentially be very limited at a minimum congress should consider restricting the federal reserve to a single goal That a price stability Congress should also restrict the ability of the fed to have discretion in implementing that goal On a very basic level a central bank that is free to define price stability to find its own objective is a central bank without any meaningful constraint With that again, I think the chairman. I think the subcommittee and I uh, Look forward to your questions Thank you very much. I yield myself five minutes for questioning First question is for dr. Calabria And I want you to follow up. I know you've talked about it in your uh statement To follow up on this relationship of the fed and the treasury And you indicate that uh, if there's to be any oversight or any connection It's more with the congress than with the executive branch and the treasury could Could could you talk a little bit more about that and exactly what what do you mean? And what has happened in the past that might suggest that we should be looking into The relationship of a treasury and the fed and uh, how that could be a negative or why some people think it's a positive Well, there are a variety of different things and I'll touch on maybe I will most directly touch on first the Negotiation and implementation of dod frank treasury was the point person in negotiating dod frank for the administration Yet several of the senior advisors at treasury representing the administration were staff on loan from the federal reserve So again, you know, we I think many of us remember there was about a whole five minutes during the dod frank negotiations where Maybe they're really we're going to be serious restraints on the federal reserve where there would be a serious Examination of their bank supervision regulatory powers Again, I think the congress and gao should take a look at whether the fed should be supervising banks in general And whether the that conflicts and provides any conflict of interest with their monetary policy decisions But a having Essentially federal reserve staff at treasury negotiating on behalf of the administration Certainly in my opinion meant that there was going to be no chance that congress was actually going to be able to Peel back any of the powers of the federal reserve So a again the treasury relies very heavily on federal reserve expertise and legislative decision making Most importantly however, and it's important to keep in mind, you know, that fed independence really came out of this treasury fed accord Where prior to the 60s the federal reserve supported treasury prices essentially and tried to maintain the price of long-term treasuries In order so that the treasury department could more easily and more cheaply funded activities And again, if you have this relationship And you see this particularly with the second round of quantitative easing Where the amount that the fed were purchasing on a monthly basis was Coincidentally very close to the amount that was being issued by the treasury And and so the extent that we go down that road of potentially monetizing the debt Which I think is the ultimate concern that you have the treasury market supported by the federal reserve Which of course reduces discipline on not only the treasury but reduces discipline on congress to get its fiscal house in order So again, we rely on the markets to send us signals and the treasury market should be sending us a signal That we're headed to a financial train wreck But it's of course not because the federal reserve is intervening in that market to reduce the price signal that we'd be receiving So that's an important part of the debt market. I think is ultimately one of the more important aspects of this But again, you also see it in financial regulation In I want to emphasize again the nature of independence is supposed to be not from congress, but from the executive branch There is a variety of literature for instance in economics that talks about a political business cycle Where you would see the federal reserve try to loosen monetary policy and expectation of Presidential elections again, I would say that the empirical results in this literature are mixed But again, the emphasis is on the administration. We know that in terms of any president's reelection It's going to be far more important what the fed does compared to what any member of congress wants So again, there's far different interests and far different incentives in congress Where you have a unified incentive in the executive branch So I would emphasize again the importance is to to draw some independence from the executive branch in the federal reserve rather than from congress So just in summary the way I understand that is uh when they talk about independence, they're really not talking about independence They want to eliminate The role of the congress which uh year arguing has a responsibility So they want to be excluded from that supervision, but they don't want to be independent From the treasury. What about political or private interest influence? I mean when the bailouts came there had to been some special interest in political interest Would would that uh Could that be said to be not independent either but influenced by not only the treasury but outside interest Do you think there's much should there be concern about that? I I think there's a very absolutely strong concern about that, you know in several levels I mean one could just look at monetary policy where monetary policy is conducted in partnership with the federal reserve's Primary dealers in which it buys and sells treasury securities with to conduct its monetary policy Well, of course if you're doing bank supervision You've got a financial crisis and these primary dealers find themselves in trouble The federal reserve has an incentive to try to essentially make sure that those primary dealers survive And of course it doesn't want to make any of that public Uh, I would sure you could ask any of the largest firms that were assisted whether it was a goldman or whether society general They have not welcomed the attention that they've gotten when all of this information has come out You know, we heard a little bit earlier about the g a report One of the things that struck me is if you look through the tables and you look through the information of the ga air report Regardless of the program, it's the same companies that keep repeatedly coming up You know repeatedly we see city repeatedly. We see bank of america repeatedly. We say morgan stanley Regardless of the program, it seems to be that the concentration of the benefits of these programs are with a handful of corporations And of course those corporations I think would not do not want the public attention But they have repeatedly received incredible assistance from the federal reserve or credible assistance that's been off budget So again that relationship and that revolving door We've seen it and again, you know, this is something that was talked about in dod frank some of the governance issues You know, we all remember very much the the role of Goldman essentially being the the chair of the board at the new york fed and some of the conflict of interest there And certainly goes worse saying that the current President of the new york fed is a former goldman employee So not only am I concerned about the revolving door between treasury and the fed. I'm also very concerned about the revolving door Between wall street and the fed Thank you. Uh, if I missed to mr luka mark from missouri Thank you, mr chairman Dr. Arbach In your testimony, you Mentioned two or three things here the la fed whenever there was some corruption that was exposed and some folks stole some money The federal airplane or the federal reserve airplane fleet The audits that are being performed or would should be performed. Um, would they have caught these abuses? Uh Did the audits Have abuses. I know that the audit would the audits that are being proposed in other words, uh, right now we've got the, uh Well the inspector general folks here at gao, we're here to go and they were they're You're doing an audit on the emergency loan program that was that was administered Uh, they don't uh, they don't touch any of these don't touch any of these things I'll say and that's it you're you're saying we should expand Definitely audit procedures because existing audit procedures are not catching these things Definitely the there's tremendous problems inside the fed And the in-house audits were no good at the boston fed the The courageous people there that testified Right here about it Said that someone came up from from upstairs at the boston fed near the harbour Officials of the fed are at the top people that run the airplane fleet were down below And somebody came down as everything all right here. That was about the extents of the in-house audit And uh, there were all kinds of corruptions and uh, so many corruptions that, uh Henry Gonzalez the chairman Asked the uh, asked me to call the janet reno Justice department, which I did and They didn't want to get into it. Nobody likes to attack the fed in washington So I they said call call the inspector general of the fed which I did Very nice man brent bowen And uh, he said well I don't know if I have jurisdiction up in boston And that's one of the major problems of the fed and this new consumer Uh consumer agency that's located consumer protection agency located inside the fed The ig of the federal reserve is appointed by the head of the federal reserve So how can he investigate these things? Bernanke It cannot be investigated and his officials by the person they appoint This should be a presidential appointment and an independent ig at the fed If you want to start cleaning up this mess Do you think there's anything that should be off limits whenever it comes to disclosure of the fed activities? um That's a very interesting question because Um The fed is now shredding their documents, but arthur burns who was the head of the fed back in the 70s He died 1987 and he sent his His transcripts of the meetings Up to the university of michigan the ford library And they had uh people from the national National archivist professional archivists Took out anything that had to do with national security personnel They were lightly edited So I was able to go up there and get copies of them all They're very different than the kind of thing that the fed issues ask any reporter that's received something from the fed It's mostly blanked out That was a much better record And what should be done now Is that the fed should be told you cannot destroy those records. They go to the national archives after 30 years There'll be somebody looking at that And also on these FOIA requests You should get professional archivists that know the rules and cooperation with the fed instead of sending reporters blank pages Okay, dr. Klaibre, what do you think about that? There are some things that you believe they should they should not be Disclosed or off limits or you think everything is open to everything I think the way I would look at it is the question of when should it be disclosed Ultimately any sort of deliberations any sort of economic forecasts should be disclosed at some point Uh, I would be comfortable having some sort of time lag for instance One of the things that dod frank does and I think does correctly Despite that much of what the bill doesn't do correctly is require a disclosure of future discount window lending And so the concern from the federal reserve would be if you disclose at the time that banks are coming to the discount window That is a signal that such banks are weak And I think that's a legitimate concern to raise But I think if you and again in dod frank it allows up to two-year delay for that disclosure I would prefer something closer to a year But I do I would say a six month a year delay on something like discount window is legitimate in that it will not Scare away people from using the discount window. Of course, we can have exception A totally separate discussion of whether there should be a lender of last resort in a discount window But again, if you're going to have one anyone to be effective A delay of disclosure in that I think is reasonable A delay of disclosure on deliberation deliberations at the federal open market committee meetings I think are again reasonable Ultimately in a timely basis all of this information should be made public and I want to emphasize, you know five ten years is not timely You know, so again, we need to get out in a reasonable amount of time. Thank you. I yield back. Thank you, mr. Chairman I uh, thanks the gentleman And we'll go into a second series of questioning Uh, this question is for dr. Arbonne and uh, it has to do with uh, what you talked about When you were trying to get an audit in the 70s and uh You didn't get too far in a banking committee Even though it was the chairman of the banking committee that wanted to do it And then they took it and they sent it over to the government operations committee and then when they You know gave the authority for the audit it was You know actually exactly the opposite and and closed that wanted you to expand on that and Also, why don't you tell me Why it is that the individuals either in the fiat or see to it that their people get in the fiat How how come they have this much power that they That they're able to control even the banking committee chairman and then Then pass legislation You know exactly opposite of it And I think it was at that time that they really put into it to it seems like where the greatest protection is on these Foreign operations. I think that's where there's a lot of mischief and even now with our partial audit We hear about it, but we don't know exactly what transpired. Could you expand on that a little bit? Sure? Let me take the second part first on international operations um You were right about the The bill that was finally passed where The geo is not allowed to go into anything it has to do with the operations international operations or monetary policy trophies that remained on the Shelf of the fed for a long time in international operations when the fed goes for instance And notifies brokers all over the world brokers who are not They are not investigated by anybody in the united states And tells them we want to buy say five billion in euros That information is given to the brokers ahead of time And there's ever i'm not saying the brokers are dishonest, but you know when there's billions at stake in these markets They can place orders or people in their office can place orders Long before the order is consummated So we wrote the chairman wrote to ellen greenspan and said Why are you doing this? Why not just make an announcement that you're going in with five billion and let everybody in the market get in on it at the same time And he he wrote back. Well I think there's only about a 10 minute delay Between the time we tell them to do it And they buy these huge make these huge Purchases well, that's ample enough To make a lot of money in the market and so The international operations should be audited by the gao It's a really important and I think they should when the fed is going to do something They should announce it and I disagree a little bit with dr. Colabria I would not leave these decisions for discount rate changes and for Anything the federal open market committee does for more than six months. Even that is very long because There have been so many leaks at the fed the fbi has been called in all the rest It's going to leak out anyway There are several ways it leaks out One is when we ask how many people at the fed know about these secret interest rate decisions We got a whole bunch of pages single spaced of hundreds of people all over the country on these conference calls and As as greenspan reported he was saying he opens the singapore edition of the wall street journal and found out What the fed did at their meetings before? So you can't tie up information that's so valuable for months And that just benefits Inside traders and Those trophies When they did go over and put them in there It kept the gao out of a lot of lot of the Problems and can I say one other thing that I think is important? We have sitting in the audience welter charlton Who's uh had suits against the gao since 1983 Uh because The gao has had a policy alleged policy Of I had excellent people that were at the los angeles fed that did the audits They were excellent. They were old timers at the fed that knew how a central bank works And knew what to get into and what to look at Uh The the suits now in the courts all these years Uh some of them have been adjudicated some of the people that The the suits alleged they try to get rid of the older people In a recent suit. I gather that after joint session of congress 200 were rehired by the gao But they they try to get rid of the old people People that are 55 or older around there and hire young people And I can I know they hire young people because I used to have lunch with david walker when he came to the lbj school to get Some of our excellent young students but That lowers the amount they have to pay the people by a huge amount But what we need in the gao Are experienced auditors that know how central banks work And can get in there and really find out what's going on that takes a lot of training To find out how do you do a vault facility the vault facility since we found That team that was in there that I worked with was excellent And they found out what was missing in the it was just awful the the main ledger the vault on a computer Everybody could get in there without a password What happened to those officials when that thing went public? Nothing has happened since then at the fed And I think it's very important to get better gao auditors now. Maybe they have them That are experienced in how to audit a huge enormous central bank with 20 000 employees And they have vaults all over the country that hold all the money for the Commercial banks and the bureau of engraving ships it there all the new monies in there also It's a national security problem And if greenspan thought the employees were stealing 500 000 dollars in 10 years We thought that was a tremendous understatement given the and so did that Fed the gao crew, but I don't believe shortly thereafter. Most of them were no longer at the gao Thank you. I yield five minutes to mr. Lukumar Thank you mr. Chairman I have a feeling that both you gentlemen have got a lot more to say and a lot more suggestions for so I think I'll just use my time a little differently this time Dr. Calabria what regular you are the director of financial regulatory studies What one regulation would you suggest that we as a congress as a committee start out with or as congress, you know try and Put together that would be impactful Is it you know audit the full fed or are there something else that you see that could really you know protect our monetary system And really make an impact what will be your suggestion Well, I think the focus really needs to be on defining and limiting the discretion for the fed on price stability So I mean again, you could do things like reduce, you know eliminate the dual mandate You know having some sort of inflation targeting I would emphasize that ultimately what's going to be a constraint on the fed is some sort of competition So I obviously encourage you an alternative monetary mechanisms is something we should be looking at In the long run, but certainly trying to find a way to constrain the fed so I'd have a full audit I would get rid of the dual mandate I would put some statutory flesh around what exactly price stability means Because again, you could get rid of the dual mandate But if the fed decides that price stability is three or four percent then it then it doesn't really matter You have to take some of these definitions back into congress And again, I want to emphasize One of the reasons I think that the federal reserve has been so effective over the years at thwarting congress Is that they come up here and they give you all this gobbledygook about you know M1 M2 and all this and they try to confuse you and again the most important thing is to get information out there So that members of congress can even start with the very right questions and and can push them You know and basically not let them get around that So you know most important thing we can do is to educate congress and public on how exactly monetary policy works Very good. As for one got three must be dc. Thank you Dr. Harbach with regards the same question You you've had a lot of advice for us in some of your previous Comments here. What what piece of advice or regulation would you suggest? uh, well Price stability is certainly important, but the fed should understand It's the 1949 employment act that said they have to do Full employment also that price stability helps produce full employment And right now we have we have quite a bit of inflation year over year one month It was four percent then five percent Then Bernanke testified that he doesn't see any inflation How high does it have to go before he sees it? That's year over year inflation and the other thing that I think The congress should have something to say about is what I call malpractice at the fed in In september in september 2008 when Lehman brothers collapsed and the markets went crazy all over the world One month later the fed decided That they'd start paying the bank's interest In order that for them to hold their reserves Do I have that diagram? I wonder if you put it up of the amount of There it is there The amount of excess reserve you'll notice That since the begin this is the federal reserve of st. Louis. It's zero All of a sudden in 210 the Banks, you know, they're they're intelligent. They say look we can get a quarter percent interest risk free from the fed Why should we loan it to businesses? So the fed began pumping in Their monetary base they pumped in 1.9 trillion How much of that got out for loans? to banks and and uh to businesses 1.7 trillion Was parked as excess reserves is there today uh Out of that the total today is 1.6 trillion in excess reserve. Excuse me 1.6 trillion It went through the roof now. We're in a position today Where people inside the fed Economists inside the fed like william gabin a great economist at the st. Louis fed Published in their literature for the banks. It's a much better investment to hold the money as excess reserves tie it up Then to lend it out to people because they get a quarter percent for sure. We're in a terrible environment What should be done immediately? I call this malpractice. It's certainly increased unemployment in the united states The fed must Stop paying the banks to hold reserves instead of lending it to businesses And if they do that they've got to be very careful that the money supply doesn't balloon out or will have a huge inflation They will have to slightly raise their target interest rate to about a half percent They should be doing that. They've been at zero long enough and you can see what good that has done for the country Thank you very much. I yield back Thank you. I have uh one more question for for the two of you We we talk about the transparency and how to get information out and how dangerous it is if somebody gets the information They can make some money on it Because the the mark they anticipate what the market will do and also the there's so often the unintended consequences of manipulating What they do the economic consequences And we talk and discuss and there was a slight disagreement on exactly when we release information When did the fed do this and when do we get a record of the history? My question is a little bit different. It has actually to do with monetary policy per se not how We tell the how the fed manages monetary policy From my viewpoint see they've had two mandates full employment And I don't think either one of you sort of enjoy that employment You know if you really look at the old fashion way of measuring it's probably over 20 And then dr. Arbach admitted that price stability there. They're not doing very well there But but I sort of got the Indication from both of you that It wasn't the principle of setting the interest rates is it's how they do it and when it's released and and the details of it But what about the the question of whether or not they should be messing around with interest rates? You know most most economists These days ever since the 70s they sort of have Played down wage and price controls wage and price controls aren't very good as a solution to to solve the problem of price inflation created by too much money but Setting interest rates is a pretty big deal I mean if if interest rates if prices are the signal That tells the businessman what to do and the consumer what to do the supply and demand and of course Free market economists predicted that socialism would absolutely fail without a pricing structure But why is it that we've accepted this idea that the Fed is all knowing with their record? So could you each tell me that? Do you think it would be bad to have a system where the Fed wasn't involved with setting interest rates and Maybe market rates would help maybe market rates would help help savings You know, maybe interest rates would go up into people who who tend not to want to gamble in the stock market and the bond market Wouldn't this be a help to economy? Could both you just make a comment about Whether or not the Fed should be setting interest rates? Well, I think that's a really good question and in 1979 We had a little Party right here in this room And the new chairman was coming on board Uh He was a very good chairman of voker And at that time By 1980 the inflation in the united states was going over 13 percent Interest rates went up over 20 percent. There were mass bankruptcies in the country And uh voker was laughing with us and said To two of us from the university of chicago, you give me a pain in my you know what? And we laughed together, but then voker decided he wouldn't control interest rates He would control the money supply and stop printing so much money Which he did he paid a big price But he stopped the country from going into a terrible inflation. We had a double dip I was in the reagan administration and we had a double dip Recession 10 unemployed, but then we had a long period Of no inflation. So he did a great job. We paid a terrible price But when Ellen greenspan came in The idea of controlling the money supply was considered. Oh, that's university chicago monetarists, and they don't know what they're doing So by the end of the 1980s, he decided the fed would no longer target money He would do what other central banks do just target the interest rates it's And uh, I think they should do both they should watch the money supply But they should do what congressman paul said Try to let the interest rates go to market interest rates instead of sitting on them I would start by saying that uh, I believe there's probably no more important price in the economy than the interest rate I mean you really do balance savings investment and you balance time preferences And accordingly when we get that wrong we get a whole lot wrong and you can have all sorts of disruptions to the economy So ultimately the answer should be a very strong. No, we should not have the fed being manipulating What is the most important price in the economy? I think the panel for appearing and uh, this committee is now adjourned