Federal Reserve Transparency Act of 2012

I would like to include in the record of this debate an article about the Fed's policy model

sacrificing its maximum employment mandate and targeting 5 to 6 percent as unemployment.

Speech by Janet L. Yellen, Vice Chair, Board of Governors of the

Federal Reserve System at the Boston Economic Club Dinner, Boston,

Massachusetts June 6, 2012

Perspectives on Monetary Policy

Good evening. I'm honored to have the opportunity to

address the Boston Economic Club and I'm grateful to Chip

Case for inviting me to speak to you tonight. As most of you

probably know, Chip was one of the first economists to

document worrisome signs of a housing bubble in parts of the

United States. After sounding an early alarm in 2003, Chip

watched the bubble grow and was prescient in anticipating the

very serious toll that its unwinding would impose on the

economy. Chip recognized that declining house prices would

affect not just residential construction but also consumer

spending, the ability of households to borrow, and the health

of the financial system. In light of these pervasive

linkages, the repeat sales house price index that bears

Chip's name is one of the most closely watched of all U.S.

economic indicators. Indeed, as I will discuss this evening,

prolonged weakness in the housing sector remains one of

several serious headwinds facing the U.S. economy. Given

these headwinds, I believe that a highly accommodative

monetary policy will be needed for quite some time to help

the economy mend. Before continuing, let me emphasize that my

remarks reflect my own views and not necessarily those of

others in the Federal Reserve System.

Economic Conditions and the Outlook

In my remarks tonight, I will describe my perspective on

monetary policy. To begin, however, I'll highlight some of

the current conditions and key features of the economic

outlook that shape my views. To anticipate the main points,

the economy appears to be expanding at a moderate pace. The

unemployment rate is almost 1 percentage point lower than it

was a year ago, but we are still far from full employment.

Looking ahead, I anticipate that significant headwinds will

continue to restrain the pace of the recovery so that the

remaining employment gap is likely to close only slowly. At

the same time, inflation (abstracting from the transitory

effects of movements in oil prices) has been running near 2

percent over the past two years, and I expect it to remain at

or below the Federal Open Market Committee's (the FOMC's) 2

percent objective for the foreseeable future. As always,

considerable uncertainty attends the outlook for both growth

and inflation; events could prove either more positive or

negative than what I see as the most likely outcome. That

said, as I will explain, I consider the balance of risks to

be tilted toward a weaker economy.

Starting with the labor market, conditions have gradually

improved over the past year, albeit at an uneven pace.

Average monthly payroll gains picked up from about 145,000 in

the second half of 2011 to 225,000 during the first quarter

of this year. However, these gains fell back to around 75,000

a month in April and May. The deceleration of payroll

employment from the first to the second quarter was probably

exacerbated by some combination of seasonal adjustment

difficulties and an unusually mild winter that likely boosted

employment growth earlier in the year. Payback for that

earlier strength probably accounts for some of the weakness

we've seen recently. Smoothing through these fluctuations,

the average pace of job creation for the year to date, as

well as recent unemployment benefit claims data and other

indicators, appear to be consistent with an economy expanding

at only a moderate rate, close to its potential.

Such modest growth would imply little additional progress

in the near term in improving labor market conditions, which

remain very weak. Currently, the unemployment rate stands

around 3 percentage points above where it was at the onset of

the recession--a figure that is stark enough as it is, but

does not even take account of the millions more who have left

the labor force or who would have joined under more normal

circumstances in the past four years. All told, only about

half of the collapse in private payroll employment in 2008

and 2009 has been reversed. A critical question for monetary

policy is the extent to which these numbers reflect a

shortfall from full employment versus a rise in structural

unemployment. While the magnitude of structural unemployment

is uncertain, I read the evidence as suggesting that the bulk

of the rise during the recession was cyclical, not structural

in nature.

Consider figure 1, which presents three indicators of labor

market slack. The black solid line is the unemployment gap,

defined as the difference between the actual unemployment

rate and the Congressional Budget Office (CBO) estimate of

the rate consistent with inflation remaining stable over

time. The red dashed line is an index of the difficulty

households perceive in finding jobs, based on results from a

survey conducted by the Conference Board. And the red dotted

line is an index of firms' ability to fill jobs, based on a

survey conducted by the National Federation of Independent

Business. All three measures show similar cyclical movements

over the past 20 years, and all now stand at very high

levels. This similarity runs counter to claims that the CBO's

and other estimates of the unemployment gap overstate the

true amount of slack by placing insufficient weight on

structural explanations, such as a reduced efficiency of

matching workers to jobs, for the rise in unemployment since

2007. If that were the case, why would firms now find it so

easy to fill positions? Other evidence also points to the

dominant role of cyclical forces in the recent rise in

unemployment: job losses have been widespread, rather than

being concentrated in the construction and financial sectors,

and the co-movement of job vacancies and unemployment over

the past few years does not appear to be unusual.

As I mentioned, I expect several factors to restrain the

pace of the recovery and the corresponding improvement in the

labor market going forward. The housing sector remains a

source of very significant headwinds. Housing has typically

been a driver of economic recoveries, and we have seen some

modest improvement recently, but continued uncertainties over

the direction of house prices, and very restricted mortgage

credit availability for all but the most creditworthy buyers,

will likely weigh on housing demand for some time to come.

When housing demand does pick up more noticeably, the huge

overhang of both unoccupied dwellings and homes in the

foreclosure pipeline will likely allow a good deal of that

demand to be met for a time without a sizeable expansion in

homebuilding. Moreover, the enormous toll on household wealth

resulting from the collapse of house prices--almost a 35

percent decline from its 2006 peak, according to the Case-

Shiller index--imposes ongoing restraint on consumer

spending, and the loss of home equity has impaired many

households' ability to borrow.

A second headwind that will likely become more important

over coming months relates to fiscal policy. At the federal

level, stimulus-related policies are scheduled to wind down,

while both defense and nondefense purchases are expected to

decline in inflation-adjusted terms over the next several

years. Toward the end of this year, important decisions

regarding the extension of current federal tax and budget

policies loom. I will return to the associated uncertainties

and their potentially detrimental effects later.

A third factor weighing on the outlook is the likely

sluggish pace of economic growth abroad. Strains in global

financial markets have resurfaced in recent months,

reflecting renewed uncertainty about the resolution of the

European situation. Risk premiums on sovereign debt and other

securities have risen again in many European countries, while

European banks continue to face pressure to shrink their

balance sheets. Even without a further intensification of

stresses, the slowdown in economic activity in Europe will

likely hold back U.S. export growth. Moreover, the perceived

risks surrounding the European situation are already having a

meaningful effect on financial conditions here in the United

States, further weighing on the prospects for U.S. growth.

Given these formidable challenges, most private sector

forecasters expect only gradual improvement in the labor

market and I share their view. Figure 2 shows the

unemployment rate together with the median forecast from last

month's Survey of Professional Forecasters (SPF), the dashed

blue line. The figure also shows the central tendency of the

unemployment projections that my FOMC colleagues and I made

at our April meeting: Those projections reflect our

assessments of the economic outlook given our own individual

judgements about the appropriate path of monetary policy.

Included in the figure as well is the central tendency of

FOMC participants' estimates of the longer-run normal

unemployment rate, which ranges from 5.2 percent to 6

percent. Like private forecasters, most FOMC participants

expect the unemployment rate to remain well above its longer-

run normal value over the next several years.

Of course, considerable uncertainty attends this outlook:

The shaded area provides an estimate of the 70 percent

confidence interval for the future path of the unemployment

rate based on historical experience and model simulations.

Its width suggests that these projections could be quite far

off, in either direction. Nevertheless, the figure shows that

labor market slack at present is so large that even a very

large and favorable forecast error would not change the

conclusion that slack will likely remain substantial for

quite some time.

Turning to inflation, figure 3 summarizes private and FOMC

forecasts. Overall consumer price inflation has fluctuated

quite a bit in recent years, largely reflecting movements in

prices for oil and other commodities. In early 2011 and again

earlier this year, prices of crude oil, and thus of gasoline,

rose noticeably. Smoothing through these fluctuations,

inflation as measured by the price index for personal

consumption expenditures (PCE) averaged near 2 percent over

the past two years. In recent weeks, however, oil and

gasoline prices have moderated and are now showing through to

the headline inflation figures. Looking ahead, most FOMC

participants at the time of our April meeting expected

inflation to be at, or a bit below, our long-run objective of

2 percent through 2014; private forecasters on average also

expect inflation to be close to 2 percent. As with

unemployment, uncertainty around the inflation projection is

substantial.

In the view of some observers; the stability of inflation

in the face of high unemployment in recent years constitutes

evidence

that much of the remaining unemployment is structural and not

cyclical. They reason that if there were truly substantial

slack in the labor market, simple accelerationist ``Phillips

curve'' models would predict more noticeable downward

pressure on inflation. However, substantial cross-country

evidence suggests that, in low-inflation environments,

inflation is notably less responsive to downward pressure

from labor market slack than it is when inflation is

elevated.

In other words, the short-run Phillips curve may flatten

out. One important reason for this non-linearity, in my view,

is downward nominal wage rigidity--that is, the reluctance or

inability of many firms to cut nominal wages.

The solid blue bars in figure 4 present a snapshot of the

distribution of nominal wage changes for individual jobs

during the depth of the current labor market slump, based on

data collected by the Bureau of Labor Statistics. For

comparison, the dashed red line presents a hypothetical

distribution of wage changes, using a normal distribution

that approximates the actual distribution of wage changes

greater than zero. The distribution of actual wage changes

shows that a relatively high percentage of workers saw no

change in their nominal wage, and relatively few experienced

modest wage cuts. This pile-up phenomenon at zero suggests

that, even when the unemployment rate was around 10 percent,

many firms were reluctant to cut nominal wage rates. In the

absence of this barrier, nominal gains in wages and unit

labor costs would have likely been even more subdued given

the severity of the economic downturn, with the result that

inflation would probably now be running at a lower rate.

Anchored inflation expectations are another reason why

inflation has remained close to 2 percent in the face of very

low resource utilization. As shown in figure 5, survey

measures of longer-horizon inflation expectations have

remained nearly constant since the mid-1990s even as actual

inflation has fluctuated. As a result, the current slump has

not generated the downward spiral of falling expected and

actual inflation that a simple accelerationist model of

inflation might have predicted. Indeed, keeping inflation

expectations from declining has been an important success of

monetary policy over the past few years. At the same time,

the fact that longer-term inflation expectations have not

risen above 2 percent has also proved extremely valuable, for

it has freed the FOMC to take strong actions to support the

economic recovery without greatly worrying that higher energy

and commodity prices would become ingrained in inflation and

inflation expectations, as they did in the 1970s.

While my modal outlook calls for only a gradual reduction

in labor market slack and a stable pace of inflation near the

FOMC's longer-run objective of 2 percent, I see substantial

risks to this outlook, particularly to the downside. As I

mentioned before, even without any political gridlock, fiscal

policy is bound to become substantially less accommodative

from early 2013 on. However, federal fiscal policy could turn

even more restrictive if the Congress does not reach

agreement on several important tax and budget policy issues

before the end of this year; in fact, the CBO recently warned

that the potential hit to gross domestic product (GDP) growth

could be sufficient to push the economy into recession in

2013. The deterioration of financial conditions in Europe of

late, coupled with notable declines in global equity markets,

also serve as a reminder that highly destabilizing outcomes

cannot be ruled out. Finally, besides these clearly

identifiable sources of risk, there remains the broader issue

that economic forecasters have repeatedly overestimated the

strength of the recovery and so still may be too optimistic

about the prospects that growth will strengthen.

Although I view the bulk of the increase in unemployment

since 2007 as cyclical, I am concerned that it could become a

permanent problem if the recovery were to stall. In this

economic downturn, the fraction of the workforce unemployed

for six months or more has climbed much more than in previous

recessions, and remains at a remarkably high level. Continued

high unemployment could wreak long-term damage by eroding the

skills and labor force attachment of workers suffering long-

term unemployment, thereby turning what was initially

cyclical into structural unemployment. This risk provides

another important reason to support the recovery by

maintaining a highly accommodative stance of monetary policy.

The Conduct of Policy with Unconventional Tools

Now turning to monetary policy, I will begin by discussing

the FOMC's reliance on unconventional tools to address the

disappointing pace of recovery. I will then elaborate my

rationale for supporting a highly accommodative policy

stance.

As you know, since late 2008, the FOMC's standard policy

tool, the target federal funds rate, has been maintained at

the zero lower bound. To provide further accommodation, we

have employed two unconventional tools to support the

recovery--extended forward guidance about the future path of

the federal funds rate, and large-scale asset purchases and

other balance sheet actions that have greatly increased the

size and duration of the Federal Reserve's portfolio.

These two tools have become increasingly important because

the recovery from the recession has turned out to be

persistently slower than either the FOMC or private

forecasters anticipated. Figure 6 illustrates the magnitude

of the disappointment by comparing Blue Chip forecasts for

real GDP growth made two years ago with ones made earlier

this year. As shown by the dashed blue line, private

forecasters in early 2010 anticipated that real GDP would

expand at an average annual rate of just over 3 percent from

2010 through 2014. However, actual growth in 2011 and early

2012 has turned out to be much weaker than expected, and, as

indicated by the dotted red line, private forecasters now

anticipate only a modest acceleration in real activity over

the next few years.

In response to the evolving outlook, the FOMC has

progressively added policy accommodation using both of its

unconventional tools. For example, since the federal funds

rate target was brought down to a range of 0 to \1/4\ percent

in December 2008, the FOMC has gradually adjusted its forward

guidance about the anticipated future path of the federal

funds rate. In each meeting statement from March 2009 through

June 2011, the Committee indicated its expectation that

economic conditions ``are likely to warrant exceptionally low

levels of the federal funds rate for an extended period.'' At

the August 2011 meeting, the Committee decided to provide

more specific information about the likely time horizon by

substituting the phrase ``at least through mid-2013'' for the

phrase ``for an extended period''; at the January 2012

meeting, this horizon was extended to ``at least through late

2014.'' Has this guidance worked? Figure 7 illustrates how

dramatically forecasters' expectations of future short-term

interest rates have changed. As the dashed blue line

indicates, the Blue Chip consensus forecast made in early

2010 anticipated that the Treasury-bill rate would now stand

at close to 3\1/2\ percent; today, in contrast, private

forecasters expect short-term interest rates to remain very

low in 2014.

Of course, much of this revision in interest rate

projections would likely have occurred in the absence of

explicit forward guidance; given the deterioration in

projections of real activity due to the unanticipated

persistence of headwinds, and the continued subdued outlook

for inflation, forecasters would naturally have anticipated a

greater need for the FOMC to provide continued monetary

accommodation. However, I believe the changes over time in

the language of the FOMC statement, coupled with information

provided by Chairman Bernanke and others in speeches and

congressional testimony, helped the public understand better

the Committee's likely policy response given the slower-than-

expected economic recovery. As a result, forecasters and

market participants appear to have marked down their

expectations for future short-term interest rates by more

than they otherwise would have, thereby putting additional

downward pressure on long-term interest rates, improving

broader financial conditions, and lending support to

aggregate demand.

The FOMC has also provided further monetary accommodation

over time by altering the size and composition of the Federal

Reserve's securities holdings, shown in figure 8. The

expansion in the volume of securities held by the Federal

Reserve is shown in the left panel of the figure. During 2009

and early 2010, the Federal Reserve purchased about $1.4

trillion in agency mortgage-backed securities and agency debt

securities and about $300 billion in longer-term Treasury

securities. In November 2010, the Committee initiated an

additional $600 billion in purchases of longer-term Treasury

securities, which were completed at the end of June of last

year. Last September, the FOMC decided to implement the

``Maturity Extension Program,'' which affected the maturity

composition of our Treasury holdings as shown in the right

panel. Through this program, the FOMC is extending the

average maturity of its securities holdings by selling $400

billion of Treasury securities with remaining maturities of 3

years or less and purchasing an equivalent amount of Treasury

securities with remaining maturities of 6 to 30 years. These

transactions are currently scheduled to be completed at the

end of this month.

Research by Federal Reserve staff and others suggests that

our balance sheet operations have had substantial effects on

longer-term Treasury yields, principally by reducing term

premiums on longer-dated Treasury securities. Figure 9

provides an estimate, based on Federal Reserve Board staff

calculations, of the cumulative reduction of the term premium

on 10-year Treasury securities from the three balance sheet

programs. These results suggest that our portfolio actions

are currently keeping 10-year Treasury yields roughly 60

basis points lower than they otherwise would be. Other

evidence suggests that this downward pressure has had

favorable spillover effects on other financial markets,

leading to lower long-term borrowing costs for households and

firms, higher equity valuations, and other improvements in

financial conditions that in turn have supported consumption,

investment, and net exports. Because the term premium effect

depends on both the Federal Reserve's current and expected

future asset holdings, most of this effect--without further

actions--will likely wane over the next few years as the

effect depends less and less on the current elevated level of

the balance sheet and increasingly on the level of holdings

during and after the normalization of our portfolio.

The Rationale for Highly Accommodative Policy

I have already noted that, in my view, an extended period

of highly accommodative policy is necessary to combat the

persistent headwinds to recovery. I will next explain how

I've reached this policy judgment. In evaluating the stance

of policy, I find the prescriptions from simple policy rules

a logical starting point. A wide range of such rules has been

examined in the academic literature, the most famous of which

is that proposed by John Taylor in his 1993 study. Rules of

the general sort proposed by Taylor (1993) capture well our

statutory mandate to promote maximum employment and price

stability by prescribing that the federal funds rate should

respond to the deviation of inflation from its longer-run

goal and to the output gap, given that the economy should be

at or close to full employment when the output gap--the

difference between actual GDP and an estimate of potential

output--is closed. Moreover, research suggests that such

simple rules can be reasonably robust to uncertainty about

the true structure of the economy, as they perform well in a

variety of models. Today, I will consider the prescriptions

of two such benchmark rules--Taylor's 1993 rule, and a

variant that is twice as responsive to economic slack. In my

view, this latter rule is more consistent with the FOMC's

commitment to follow a balanced approach to promoting our

dual mandate, and so I will refer to it as the ``balanced-

approach'' rule.

To show the prescriptions these rules would have called for

at the April FOMC meeting, I start with an illustrative

baseline outlook constructed using the projections for

unemployment, inflation, and the federal funds rate that FOMC

participants reported in April. I then employ the dynamics of

one of the Federal Reserve's economic models, the FRB/US

model, to solve for the joint paths of these three variables

if the short-term interest rate had instead been set

according to the Taylor (1993) rule or the balanced-approach

rule, subject, in both cases, to the zero lower bound

constraint on the federal funds rate. The dashed red line in

figure 10 shows the resulting path for the federal funds rate

under Taylor (1993) and the solid blue line with open circles

illustrates the corresponding path using the balanced-

approach rule. In both simulations, the private sector fully

understands that monetary policy follows the particular rule

in force. Figure 10 shows that the Taylor rule calls for

monetary policy to tighten immediately, while the balanced-

approach rule prescribes raising the federal funds rate in

the fourth quarter of 2014--the earliest date consistent with

the FOMC's current forward guidance of ``exceptionally low

levels for the federal funds rate at least through late

2014.''

Although simple rules provide a useful starting point in

determining appropriate policy, they by no means deserve the

``last word''--especially in current circumstances. An

alternative approach, also illustrated in figure 10, is to

compute an ``optimal control'' path for the federal funds

rate using an economic model--FRB/US, in this case. Such a

path is chosen to minimize the value of a specific ``loss

function'' conditional on a baseline forecast of economic

conditions. The loss function attempts to quantify the social

costs resulting from deviations of inflation from the

Committee's longer-run goal and from deviations of

unemployment from its longer-run normal rate. The solid green

line with dots in figure 10 shows the ``optimal control''

path for the federal funds rate, again conditioned on the

illustrative baseline outlook. This policy involves keeping

the federal funds rate close to zero until late 2015, four

quarters longer than the balanced-approach rule prescription

and several years longer than the Taylor rule. Importantly,

optimal control calls for a later lift-off date even though

this benchmark--unlike the simple policy rules--implicitly

takes full account of the additional stimulus to real

activity and inflation being provided over time by the

Federal Reserve's other policy tool, the past and projected

changes to the size and maturity of its securities holdings.

Figure 11 shows that, by keeping the federal funds rate at

its current level for longer, monetary policy under the

balanced-approach rule achieves a more rapid reduction of the

unemployment rate than monetary policy under the Taylor

(1993) rule does, while nonetheless keeping inflation near 2

percent. But the improvement in labor market conditions is

even more notable under the optimal control path, even as

inflation remains close to the FOMC's long-run inflation

objective.

As I noted, simple rules have the advantage of delivering

good policy outcomes across a broad range of models, and are

thereby relatively robust to our limited understanding of the

precise working of the economy--in contrast to optimal-

control policies, whose prescriptions are sensitive to the

specification of the particular model used in the analysis.

However, simple rules also have their shortcomings, leading

them to significantly understate the case for keeping policy

persistently accommodative in current circumstances.

One of these shortcomings is that the rules do not adjust

for the constraints that the zero lower bound has placed on

conventional monetary policy since late 2008. A second is

that they do not fully take account of the protracted nature

of the forces that have been restraining aggregate demand in

the aftermath of the housing bust. As I've emphasized, the

pace of the current recovery has turned out to be

persistently slower than most observers expected, and

forecasters expect it to remain quite moderate by historical

standards. The headwinds that explain this disappointing

performance represent a substantial departure from normal

cyclical dynamics. As a result, the economy's equilibrium

real federal funds rate--that is, the rate that would be

consistent with full employment over the medium run--is

probably well below its historical average, which the

intercept of simple policy rules is supposed to approximate.

By failing to fully adjust for this decline, the

prescriptions of simple policy rules--which provide a useful

benchmark under normal circumstances--could be significantly

too restrictive now and could remain so for some time to

come. In this regard, I think it is informative that the Blue

Chip consensus forecast released in March showed the real

three-month Treasury bill rate settling down at only 1\1/4\

percent late in the decade, down 120 basis points from the

long-run projections made prior to the recession.

Looking Ahead

Recent labor market reports and financial developments

serve as a reminder that the economy remains vulnerable to

setbacks. Indeed, the simulations I described above did not

take into account this new information. In our policy

deliberations at the upcoming FOMC meeting we will assess the

effects of these developments on the economic forecast. If

the Committee were to judge that the recovery is unlikely to

proceed at a satisfactory pace (for example, that the

forecast entails little or no improvement in the labor market

over the next few years), or that the downside risks to the

outlook had become sufficiently great, or that inflation

appeared to be in danger of declining notably below its 2

percent objective, I am convinced that scope remains for the

FOMC to provide further policy accommodation either through

its forward guidance or through additional balance-sheet

actions. In taking these decisions, however, we would need to

balance two considerations.

On the one hand, our unconventional tools have some

limitations and costs. For example, the effects of forward

guidance are likely to be weaker the longer the horizon of

the guidance, implying that it may be difficult to provide

much more stimulus through this channel. As for our balance

sheet operations, although we have now acquired some

experience with this tool, there is still considerable

uncertainty about its likely economic effects. Moreover, some

have expressed concern that a substantial further expansion

of the balance sheet could interfere with the Fed's ability

to execute a smooth exit from its accommodative policies at

the appropriate time. I disagree with this view: The FOMC has

tested a variety of tools to ensure that we will be able to

raise short-term interest rates when needed while gradually

returning the portfolio to a more normal size and

composition. But even if unjustified, such concerns could in

theory reduce confidence in the Federal Reserve and so lead

to an undesired increase in inflation expectations.

On the other hand, risk management considerations arising

from today's unusual circumstances strengthen the case for

additional accommodation beyond that called for by simple

policy rules and optimal control under the modal outlook. In

particular, as I have noted, there are a number of

significant downside risks to the economic outlook, and hence

it may well be appropriate to insure against adverse shocks

that could push the economy into territory where a self-

reinforcing downward spiral of economic weakness would be

difficult to arrest.

Conclusion

In my remarks this evening I have sought to explain why, in

my view, a highly accommodative monetary policy will remain

appropriate for some time to come. My views concerning the

stance of monetary policy reflect the FOMC's firm commitment

to the goals of maximum employment and stable prices, my

appraisal of the medium term outlook (which is importantly

shaped by the persistent legacy of the housing bust and

ensuing financial crisis), and by my assessment of the

balance of risks facing the economy. Of course, as I've

emphasized, the outlook is uncertain and the Committee will

need to adjust policy as appropriate as actual conditions

unfold. For this reason, the FOMC's forward guidance is

explicitly conditioned on its anticipation of ``low rates of

resource utilization and a subdued outlook for inflation over

the medium run.'' If the recovery were to proceed faster than

expected or if inflation pressures were to pick up

materially, the FOMC could adjust policy by bringing forward

the expected date of tightening. In contrast, if the

Committee judges that the recovery is proceeding at an

insufficient pace, we could undertake portfolio actions such

as additional asset purchases or a further maturity extension

program. It is for this reason that the FOMC emphasized, in

its statement following the April meeting, that it would

``regularly review the size and composition of its securities

holdings and is prepared to adjust those holdings as

appropriate to promote a stronger economic recovery in a

context of price stability.''

I would also like to include in the record of this debate an article from Bloomberg News that talks about how secret Fed loans gave

banks billions that were undisclosed to Congress.

[From: Bloomberg Markets Magazine,

Nov. 27, 2011]

Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress

(By Bob Ivry, Bradley Keoun, and Phi Kuntz)

The Federal Reserve and the big banks fought for more than

two years to keep details of the largest bailout in U.S.

history a secret. Now, the rest of the world can see what it

was missing. The Fed didn't tell anyone which banks were in

trouble so deep they required a combined $1.2 trillion on

Dec. 5, 2008, their single neediest day. Bankers didn't

mention that they took tens of billions of dollars in

emergency loans at the same time they were assuring investors

their firms were healthy. And no one calculated until now

that banks reaped an estimated $13 billion of income by

taking advantage of the Fed's below-market rates, Bloomberg

Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government

regulations, a job made easier by the Fed, which never

disclosed the details of the rescue to lawmakers even as

Congress doled out more money and debated new rules aimed at

preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009

emerges from 29,000 pages of Fed documents obtained under the

Freedom of Information Act and central bank records of more

than 21,000 transactions. While Fed officials say that almost

all of the loans were repaid and there have been no losses,

details suggest taxpayers paid a price beyond dollars as the

secret funding helped preserve a broken status quo and

enabled the biggest banks to grow even bigger.

``Change Their Votes''

``When you see the dollars the banks got, it's hard to make

the case these were successful institutions,'' says Sherrod

Brown, a Democratic Senator from Ohio who in 2010 introduced

an unsuccessful bill to limit bank size. ``This is an issue

that can unite the Tea Party and Occupy Wall Street. There

are lawmakers in both parties who would change their votes

now.'' The size of the bailout came to light after Bloomberg

LP, the parent of Bloomberg News, won a court case against

the Fed and a group of the biggest U.S. banks called Clearing

House Association LLC to force lending details into the open.

The Fed, headed by Chairman Ben S. Bernanke, argued that

revealing borrower details would create a stigma--investors

and counterparties would shun firms that used the central

bank as lender of last resort--and that needy institutions

would be reluctant to borrow in the next crisis. Clearing

House Association fought Bloomberg's lawsuit up to the U.S.

Supreme Court, which declined to hear the banks' appeal in

March 2011.

$7.77 Trillion

The amount of money the central bank parceled out was

surprising even to Gary H. Stern, president of the Federal

Reserve Bank of Minneapolis from 1985 to 2009, who says he

``wasn't aware of the magnitude.'' It dwarfed the Treasury

Department's better-known $700 billion Troubled Asset Relief

Program, or TARP. Add up guarantees and lending limits, and

the Fed had committed $7.77 trillion as of March 2009 to

rescuing the financial system, more than half the value of

everything produced in the U.S. that year.

``TARP at least had some strings attached,'' says Brad

Miller, a North Carolina Democrat on the House Financial

Services Committee, referring to the program's executive-pay

ceiling. ``With the Fed programs, there was nothing.''

Bankers didn't disclose the extent of their borrowing. On

Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief

Executive Officer Kenneth D. Lewis wrote to shareholders that

he headed ``one of the strongest and most stable major banks

in the world.'' He didn't say that his Charlotte, North

Carolina-based firm owed the central bank $86 billion that

day.

``Motivate Others''

JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a

March 26, 2010, letter that his bank used the Fed's Term

Auction Facility ``at the request of the Federal Reserve to

help motivate others to use the system.'' He didn't say that

the New York-based bank's total TAF borrowings were almost

twice its cash holdings or that its peak borrowing of $48

billion on Feb. 26, 2009, came more than a year after the

program's creation.

Howard Opinsky, a spokesman for JPMorgan (JPM), declined to

comment about Dimon's statement or the company's Fed

borrowings. Jerry Dubrowski, a spokesman for Bank of America,

also declined to comment.

The Fed has been lending money to banks through its so-

called discount window since just after its founding in 1913.

Starting in August 2007, when confidence in banks began to

wane, it created a variety of ways to bolster the financial

system with cash or easily traded securities. By the end of

2008, the central bank had established or expanded ii lending

facilities catering to banks, securities firms and

corporations that couldn't get short-term loans from their

usual sources.

``Core Function''

``Supporting financial-market stability in times of extreme

market stress is a core function of central banks,'' says

William B. English, director of the Fed's Division of

Monetary Affairs. ``Our lending programs served to prevent a

collapse of the financial system and to keep credit flowing

to American families and businesses.''

The Fed has said that all loans were backed by appropriate

collateral. That the central bank didn't lose money should

``lead to praise of the Fed, that they took this

extraordinary step and they got it right,'' says Phillip

Swagel, a former assistant Treasury secretary under Henry M.

Paulson and now a professor of international economic policy

at the University of Maryland. The Fed initially released

lending data in aggregate form only. Information on which

banks borrowed, when, how much and at what interest rate was

kept from public view.

The secrecy extended even to members of President George W.

Bush's administration who managed TARP. Top aides to Paulson

weren't privy to Fed lending details during the creation of

the program that provided crisis funding to more than 700

banks, say two former senior Treasury officials who requested

anonymity because they weren't authorized to speak.

Big Six

The Treasury Department relied on the recommendations of

the Fed to decide which banks were healthy enough to get TARP

money and how much, the former officials say. The six biggest

U.S. banks, which received $160 billion of TARP funds,

borrowed as much as $460 billion from the Fed, measured by

peak daily debt calculated by Bloomberg using data obtained

from the central bank. Paulson didn't respond to a request

for comment.

The six--JPMorgan, Bank of America, Citigroup Inc. (C),

Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS) and

Morgan Stanley--accounted for 63 percent of the average daily

debt to the Fed by all publicly traded U.S. banks, money

managers and investment- services firms, the data show. By

comparison, they had about half of the industry's assets

before the bailout, which lasted from August 2007 through

April 2010. The daily debt figure excludes cash that banks

passed along to money-market funds.

Bank Supervision

While the emergency response prevented financial collapse,

the Fed shouldn't have allowed conditions to get to that

point, says Joshua Rosner, a banking analyst with Graham

Fisher & Co. in New York who predicted problems from lax

mortgage underwriting as far back as 2001. The Fed, the

primary supervisor for large financial companies, should have

been more vigilant as the housing bubble formed, and the

scale of its lending shows the ``supervision of the banks

prior to the crisis was far worse than we had imagined,''

Rosner says.

Bernanke in an April 2009 speech said that the Fed provided

emergency loans only to ``sound institutions,'' even though

its internal assessments described at least one of the

biggest borrowers, Citigroup, as ``marginal.''

On Jan. 14, 2009, six days before the company's central

bank loans peaked, the New York Fed gave CEO Vikram Pandit a

report declaring Citigroup's financial strength to be

``superficial,'' bolstered largely by its $45 billion of

Treasury funds. The document was released in early 2011 by

the Financial Crisis Inquiry Commission, a panel empowered by

Congress to probe the causes of the crisis.

``Need Transparency''

Andrea Priest, a spokeswoman for the New York Fed, declined

to comment, as did Jon Diat, a spokesman for Citigroup.

``I believe that the Fed should have independence in

conducting highly technical monetary policy, but when they

are putting taxpayer resources at risk, we need transparency

and accountability,'' says Alabama Senator Richard Shelby,

the top Republican on the Senate Banking Committee.

Judd Gregg, a former New Hampshire senator who was a lead

Republican negotiator on TARP, and Barney Frank, a

Massachusetts Democrat who chaired the House Financial

Services Committee, both say they were kept in the dark.

``We didn't know the specifics,'' says Gregg, who's now an

adviser to Goldman Sachs.

``We were aware emergency efforts were going on,'' Frank

says. ``We didn't know the specifics.''

Disclose Lending

Frank co-sponsored the Dodd-Frank Wall Street Reform and

Consumer Protection Act, billed as a fix for financial-

industry excesses. Congress debated that legislation in 2010

without a full understanding of how deeply the banks had

depended on the Fed for survival. It would have been

``totally appropriate'' to disclose the lending data by mid-

2009, says David Jones, a former economist at the Federal

Reserve Bank of New York who has written four books about the

central bank.

``The Fed is the second-most-important appointed body in

the U.S., next to the Supreme Court, and we're dealing with a

democracy,'' Jones says. ``Our representatives in Congress

deserve to have this kind of information so they can oversee

the Fed.''

The Dodd-Frank law required the Fed to release details of

some emergency-lending programs in December 2010. It also

mandated disclosure of discount-window borrowers after a two-

year lag.

Protecting TARP

TARP and the Fed lending programs went ``hand in hand,''

says Sherrill Shaffer, a banking professor at the University

of Wyoming in Laramie and a former chief economist at the New

York Fed. While the TARP

money helped insulate the central bank from losses, the Fed's

willingness to supply seemingly unlimited financing to the

banks assured they wouldn't collapse, protecting the

Treasury's TARP investments, he says.

``Even though the Treasury was in the headlines, the Fed

was really behind the scenes engineering it,'' Shaffer says.

Congress, at the urging of Bernanke and Paulson, created

TARP in October 2008 after the bankruptcy of Lehman Brothers

Holdings Inc. made it difficult for financial institutions to

get loans. Bank of America and New York-based Citigroup each

received $45 billion from TARP. At the time, both were

tapping the Fed. Citigroup hit its peak borrowing of $99.5

billion in January 2009, while Bank of America topped out in

February 2009 at $91.4 billion.

No Clue

Lawmakers knew none of this.

They had no clue that one bank, New York-based Morgan

Stanley (MS), took $107 billion in Fed loans in September

2008, enough to pay off one-tenth of the country's delinquent

mortgages. The firm's peak borrowing occurred the same day

Congress rejected the proposed TARP bill, triggering the

biggest point drop ever in the Dow Jones Industrial Average.

(INDU) The bill later passed, and Morgan Stanley got $10

billion of TARP funds, though Paulson said only ``healthy

institutions'' were eligible.

Mark Lake, a spokesman for Morgan Stanley, declined to

comment, as did spokesmen for Citigroup and Goldman Sachs.

Had lawmakers known, it ``could have changed the whole

approach to reform legislation,'' says Ted Kaufman, a former

Democratic Senator from Delaware who, with Brown, introduced

the bill to limit bank size.

Moral Hazard

Kaufman says some banks are so big that their failure could

trigger a chain reaction in the financial system. The cost of

borrowing for so-called too-big-to-fail banks is lower than

that of smaller firms because lenders believe the government

won't let them go under. The perceived safety net creates

what economists call moral hazard--the belief that bankers

will take greater risks because they'll enjoy any profits

while shifting losses to taxpayers.

If Congress had been aware of the extent of the Fed rescue,

Kaufman says, he would have been able to line up more support

for breaking up the biggest banks.

Byron L. Dorgan, a former Democratic senator from North

Dakota, says the knowledge might have helped pass legislation

to reinstate the Glass-Steagall Act, which for most of the

last century separated customer deposits from the riskier

practices of investment banking.

``Had people known about the hundreds of billions in loans

to the biggest financial institutions, they would have

demanded Congress take much more courageous actions to stop

the practices that caused this near financial collapse,''

says Dorgan, who retired in January.

Getting Bigger

Instead, the Fed and its secret financing helped America's

biggest financial firms get bigger and go on to pay employees

as much as they did at the height of the housing bubble.

Total assets held by the six biggest U.S. banks increased

39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8

trillion on the same day in 2006, according to Fed data.

For so few banks to hold so many assets is ``un-American,''

says Richard W. Fisher, president of the Federal Reserve Bank

of Dallas. ``All of these gargantuan institutions are too big

to regulate. I'm in favor of breaking them up and slimming

them down.''

Employees at the six biggest banks made twice the average

for all U.S. workers in 2010, based on Bureau of Labor

Statistics hourly compensation cost data. The banks spent

$146.3 billion on compensation in 2010, or an average of

$126,342 per worker, according to data compiled by Bloomberg.

That's up almost 20 percent from five years earlier compared

with less than 15 percent for the average worker. Average pay

at the banks in 2010 was about the same as in 2007, before

the bailouts.

``Wanted to Pretend''

``The pay levels came back so fast at some of these firms

that it appeared they really wanted to pretend they hadn't

been bailed out,'' says Anil Kashyap, a former Fed economist

who's now a professor of economics at the University of

Chicago Booth School of Business. ``They shouldn't be

surprised that a lot of people find some of the stuff that

happened totally outrageous.''

Bank of America took over Merrill Lynch & Co. at the urging

of then-Treasury Secretary Paulson after buying the biggest

U.S. home lender, Countrywide Financial Corp. When the

Merrill Lynch purchase was announced on Sept. 15, 2008, Bank

of America had $14.4 billion in emergency Fed loans and

Merrill Lynch had $8.1 billion. By the end of the month, Bank

of America's loans had reached $25 billion and Merrill

Lynch's had exceeded $60 billion, helping both firms keep the

deal on track.

Prevent Collapse

Wells Fargo bought Wachovia Corp., the fourth-largest U.S.

bank by deposits before the 2008 acquisition. Because

depositors were pulling their money from Wachovia, the Fed

channeled $50 billion in secret loans to the Charlotte, North

Carolina-based bank through two emergency-financing programs

to prevent collapse before Wells Fargo could complete the

purchase. ``These programs proved to be very successful at

providing financial markets the additional liquidity and

confidence they needed at a time of unprecedented

uncertainty,'' says Ancel Martinez, a spokesman for Wells

Fargo.

JPMorgan absorbed the country's largest savings and loan,

Seattle-based Washington Mutual Inc., and investment bank

Bear Stearns Cos. The New York Fed, then headed by Timothy F.

Geithner, who's now Treasury secretary, helped JPMorgan

complete the Bear Stearns deal by providing $29 billion of

financing, which was disclosed at the time. The Fed also

supplied Bear Stearns with $30 billion of secret loans to

keep the company from failing before the acquisition closed,

central bank data show. The loans were made through a program

set up to provide emergency funding to brokerage firms.

``Regulatory Discretion''

``Some might claim that the Fed was picking winners and

losers, but what the Fed was doing was exercising its

professional regulatory discretion,'' says John Deane, a

former speechwriter at the New York Fed who's now executive

vice president for policy at the Financial Services Forum, a

Washington-based group consisting of the CEOs of 20 of the

world's biggest financial firms. ``The Fed clearly felt it

had what it needed within the requirements of the law to

continue to lend to Bear and Wachovia.''

The bill introduced by Brown and Kaufman in April 2010

would have mandated shrinking the six largest firms.

``When a few banks have advantages, the little guys get

squeezed,'' Brown says. ``That, to me, is not what capitalism

should be.''

Kaufman says he's passionate about curbing too-big-to-fail

banks because he fears another crisis.

``Can We Survive?''

``The amount of pain that people, through no fault of their

own, had to endure--and the prospect of putting them through

it again--is appalling,'' Kaufman says. ``The public has no

more appetite for bailouts. What would happen tomorrow if one

of these big banks got in trouble? Can we survive that?''

Lobbying expenditures by the six banks that would have been

affected by the legislation rose to $29.4 million in 2010

compared with $22.1 million in 2006, the last full year

before credit markets seized up--a gain of 33 percent,

according to OpenSecrets.org, a research group that tracks

money in U.S. politics. Lobbying by the American Bankers

Association, a trade organization, increased at about the

same rate, OpenSecrets.org reported.

Lobbyists argued the virtues of bigger banks. They're more

stable, better able to serve large companies and more

competitive internationally, and breaking them up would cost

jobs and cause ``long-term damage to the U.S. economy,''

according to a Nov. 13, 2009, letter to members of Congress

from the FSF.

The group's website cites Nobel Prize-winning economist

Oliver E. Williamson, a professor emeritus at the University

of California, Berkeley, for demonstrating the greater

efficiency of large companies.

``Serious Burden''

In an interview, Williamson says that the organization took

his research out of context and that efficiency is only one

factor in deciding whether to preserve too-big-to-fail banks.

``The banks that were too big got even bigger, and the

problems that we had to begin with are magnified in the

process,'' Williamson says. ``The big banks have incentives

to take risks they wouldn't take if they didn't have

government support. It's a serious burden on the rest of the

economy.''

Deane says his group didn't mean to imply that Williamson

endorsed big banks.

Top officials in President Barack Obama's administration

sided with the FSF in arguing against legislative curbs on

the size of banks.

Geithner, Kaufman

On May 4, 2010, Geithner visited Kaufman in his Capitol

Hill office. As president of the New York Fed in 2007 and

2008, Geithner helped design and run the central bank's

lending programs. The New York Fed supervised four of the six

biggest U.S. banks and, during the credit crunch, put

together a daily confidential report on Wall Street's

financial condition. Geithner was copied on these reports,

based on a sampling of e-mails released by the Financial

Crisis Inquiry Commission.

At the meeting with Kaufman, Geithner argued that the issue

of limiting bank size was too complex for Congress and that

people who know the markets should handle these decisions,

Kaufman says. According to Kaufman, Geithner said he

preferred that bank supervisors from around the world,

meeting in Basel, Switzerland, make rules increasing the

amount of money banks need to hold in reserve. Passing laws

in the U.S. would undercut his efforts in Basel, Geithner

said, according to Kaufman.

Anthony Coley, a spokesman for Geithner, declined to

comment.

``Punishing Success''

Lobbyists for the big banks made the winning case that

forcing them to break up was ``punishing success,'' Brown

says. Now that they can see how much the banks were borrowing

from the Fed, senators might think differently, he says.

The Fed supported curbing too-big-to-fail banks, including

giving regulators the power to close large financial firms

and implementing tougher supervision for big banks, says Fed

General Counsel Scott G. Alvarez. The Fed didn't take a

position on whether large banks should be dismantled before

they get into trouble.

Dodd-Frank does provide a mechanism for regulators to break

up the biggest banks. It established the Financial Stability

Oversight Council that could order teetering banks to shut

down in an orderly way. The council is headed by Geithner.

``Dodd-Frank does not solve the problem of too big to

fail,'' says Shelby, the Alabama Republican. ``Moral hazard

and taxpayer exposure still very much exist.''

Below Market

Dean Baker, co-director of the Center for Economic and

Policy Research in Washington, says banks ``were either in

bad shape or taking advantage of the Fed giving them a good

deal. The former contradicts their public statements. The

latter--getting loans at below-market rates during a

financial crisis--is quite a gift.''

The Fed says it typically makes emergency loans more

expensive than those available in the marketplace to

discourage banks from abusing the privilege. During the

crisis, Fed loans were among the cheapest around, with

funding available for as low as 0.01 percent in December

2008, according to data from the central bank and money-

market rates tracked by Bloomberg.

The Fed funds also benefited firms by allowing them to

avoid selling assets to pay investors and depositors who

pulled their money. So the assets stayed on the banks' books,

earning interest.

Banks report the difference between what they earn on loans

and investments and their borrowing expenses. The figure,

known as net interest margin, provides a clue to how much

profit the firms turned on their Fed loans, the costs of

which were included in those expenses. To calculate how much

banks stood to make, Bloomberg multiplied their tax-adjusted

net interest margins by their average Fed debt during

reporting periods in which they took emergency loans.

Added Income

The 190 firms for which data were available would have

produced income of $13 billion, assuming all of the bailout

funds were invested at the margins reported, the data show.

The six biggest U.S. banks' share of the estimated subsidy

was $4.8 billion, or 23 percent of their combined net income

during the time they were borrowing from the Fed. Citigroup

would have taken in the most, with $1.8 billion.

``The net interest margin is an effective way of getting at

the benefits that these large banks received from the Fed,''

says Gerald A. Hanweck, a former Fed economist who's now a

finance professor at George Mason University in Fairfax,

Virginia.

While the method isn't perfect, it's impossible to state

the banks' exact profits or savings from their Fed loans

because the numbers aren't disclosed and there isn't enough

publicly available data to figure it out.

Opinsky, the JPMorgan spokesman, says he doesn't think the

calculation is fair because ``in all likelihood, such funds

were likely invested in very short-term investments,'' which

typically bring lower returns.

Standing Access

Even without tapping the Fed, the banks get a subsidy by

having standing access to the central bank's money, says

Viral Acharya, a New York University economics professor who

has worked as an academic adviser to the New York Fed.

``Banks don't give lines of credit to corporations for

free,'' he says. ``Why should all these government guarantees

and liquidity facilities be for free?''

In the September 2008 meeting at which Paulson and Bernanke

briefed lawmakers on the need for TARP, Bernanke said that if

nothing was done, ``unemployment would rise--to 8 or 9

percent from the prevailing 6.1 percent,'' Paulson wrote in

``On the Brink'' (Business Plus, 2010).

Occupy Wall Street

The U.S. jobless rate hasn't dipped below 8.8 percent since

March 2009, 3.6 million homes have been foreclosed since

August 2007, according to data provider RealtyTrac Inc., and

police have clashed with Occupy Wall Street protesters, who

say government policies favor the wealthiest citizens, in New

York, Boston, Seattle and Oakland, California.

The Tea Party, which supports a more limited role for

government, has its roots in anger over the Wall Street

bailouts, says Neil M. Barofsky, former TARP special

inspector general and a Bloomberg Television contributing

editor.

``The lack of transparency is not just frustrating; it

really blocked accountability,'' Barofsky says. ``When people

don't know the details, they fill in the blanks. They believe

in conspiracies.''

In the end, Geithner had his way. The Brown-Kaufman

proposal to limit the size of banks was defeated, 60 to 31.

Bank supervisors meeting in Switzerland did mandate minimum

reserves that institutions will have to hold, with higher

levels for the world's largest banks, including the six

biggest in the U.S. Those rules can be changed by individual

countries. They take full effect in 2019.

Meanwhile, Kaufman says, ``we're absolutely, totally, 100

percent not prepared for another financial crisis.''

This is all about disclosure and accountability. You know, the Fed's not some kind of hocus-pocus, black box operation. The Fed essentially supplants the constitutional mandate in article I, section 8 that belongs to the Congress of the United States.

Let's look at some recent history here: 2008, subprime meltdown, collateralized debt obligations go back to mortgage-backed securities. Neighborhoods in Cleveland melting down, people losing their homes. The Fed looked the other way.

And we're saying, don't go into the Fed; it will be political. Yes, it's political. We have unemployment because of politics. We have people losing their homes because of politics. We have banks getting uncalculated amounts of money from the Federal Reserve, and we don't even know about it.

Meanwhile, people can't get a loan to keep their home or keep their business.

Audit the Fed? You bet we should audit the Fed. We have to have accountability. It's time the Congress stood up for its constitutional role. Article I, section 8: power to coin and create money.

It's time that we stood up for America's 99 percent. It's time that we stood up to the Federal Reserve that right now acts like it's some kind of high, exalted priesthood, unaccountable in a democracy.

Let's change that by voting for the Paul bill.

Mr. Speaker, I move to suspend the rules and pass the bill (H.R. 459) to require a full audit of the Board of Governors of the Federal Reserve System and the Federal reserve banks by the Comptroller General of the United States before the end of 2012, and for other purposes, as amended.

Mr. Speaker, I ask unanimous consent that all Members may have 5 legislative days within which to revise and extend their remarks and include extraneous materials on the bill under consideration.

I yield myself such time as I may consume.

H.R. 459, the Federal Reserve Transparency Act, directs the GAO to conduct a full audit of the Federal Reserve. The Dodd-Frank legislation mandated a GAO audit of the Fed, but that audit, issued by the Government Accountability Office in July of 2011, focused solely on the issues concerning emergency credit facilities.

GAO remains restricted, under the current law, from conducting a broader audit of the Fed that includes, for instance, a review of the Fed's monetary policy operations and its agreements with foreign governments and central banks. The bill remedies this situation by permitting GAO, the investigative arm of Congress, to conduct a nonpartisan audit that will review all of these transactions. The findings of the audit are to be reported to Congress.

It is particularly appropriate that we consider this legislation at this time. While Congress should not manage or micromanage details of monetary policy, it needs to be able to conduct oversight of the Fed. The Fed was created by Congress to be a central bank, independent of the influence of the U.S. Treasury. It was never intended to, in fact, be independent of Congress or independent of the American people.

In recent years, the Fed's extraordinary interventions into the economy and financial markets have led some to call into question its independence. We do not ask for an audit for that reason. We ask for an audit because the American people ultimately must be able to hold the Fed accountable; and to do so, they must know, at least in retrospect, what the Fed has done over these many years that it has been without an audit. That is why I support H.R. 459, a bipartisan bill with 273 other cosponsors.

I urge my colleagues' support, and I reserve the balance of my time.

Announcement by the Speaker Pro Tempore

Mr. Speaker, it's now my honor to yield 2 minutes to the gentleman from Texas (Mr. Paul), the author of this bill and the man who understands that not knowing should never be an answer.

Will the gentleman yield?

I thank the gentleman. Would you suggest that we should do both of those?

As I introduced my good friend and leader on this issue, Mr. Chaffetz, I might note that when the word ``Democrat'' and ``Republican'' are used in this Hall, hopefully when there are 45 Democratic Members on this bill as cosponsors, we would recognize this is a bipartisan bill.

I now yield 2 minutes to the gentleman from Utah (Mr. Chaffetz).

It is now my honor to yield 1 minute to the gentleman from Texas (Mr. Farenthold).

It is now my honor to yield 1 minute to the gentleman from Michigan (Mr. Amash).

Mr. Speaker, the rules of the House prohibit going after someone's motivation. I'm very concerned that a bill that, in a substantially similar form, was placed into Dodd-Frank by then-Chairman Barney Frank is now being characterized as somehow ill-intended and mischievous activity by the proponent. I would trust that that is not the intent of the speakers on behalf of that side of the aisle about this bipartisan bill. It is virtually identical to the language that Barney Frank put into Dodd-Frank.

I yield to the gentleman from North Carolina.

Reclaiming my time, I would like to yield 15 seconds to the gentleman from Texas, the author of the bill.

I now yield 1 minute to the gentleman from Montana (Mr. Rehberg).

History records that Democrats broadly voted for it when it was voted out of this body. Nothing more need be said.

With that, I yield 1 minute to the gentlelady from Tennessee (Mrs. Blackburn).

Mr. Speaker, can I inquire how much time we both have remaining, please.

I now yield 1 minute to the gentlelady from Kansas (Ms. Jenkins).

I yield 1 minute to the gentlewoman from Wyoming (Mrs. Lummis).

I yield myself 2 minutes.

Mr. Speaker, it appears as though we agree on certain things. We agree that some transparency is required. We certainly agree, on a bipartisan basis, that what the GAO did, under Dodd-Frank, at a minimum, was a good thing. I think there's no question my colleague who was here earlier, Mr. Frank, certainly would agree to the numbers, the expansion of the Fed in that period that Mrs. Lummis talked about between 2008 and now.

I think we would all agree the Federal Reserve is the people's bank. It is broadly owned by 316 or 320 million Americans.

I served on the board of a public company, one that I founded. I understand that if you have more than 500 stockholders, you have an obligation to considerable disclosure.

Although the Fed is audited to see whether, basically, some numbers are correct or not on a limited basis, the truth is the Federal Reserve is not open and transparent, not even years after they make decisions.

I think the American people have a piercing question right now, one that is not the question that Dr. Paul was asking when he first wanted to audit the Fed. The question is, Will we be like Greece? Will we be like Germany? Will we be like the trauma that's sweeping over the European Union?

Do we, in fact, know the true numbers? Do we know the extent of the leverage and the policies and the accuracy and the knowledge of the Federal Reserve?

I think calmly we have to ask that question. Do we know what we need to know, or are we willing to not know, in hopes that we won't be political because we don't know?

I've been in Congress for 12 full years at the end of this term, and I've learned one thing: Congress has a tendency to do two things well: nothing at

all, and overreact. I trust today will be a day in which we're in between.

I yield myself an additional minute.

We would do something so that we would know more a year from now than we know today. We would not overreact. We would not want to stifle what the Fed has done historically, without an awful lot more study. Changes to an entity like the Central Bank should be done thoughtfully and over time.

My friend, Dr. Paul, would like to do more than this bill does; but this minimal effort, offered on a bipartisan basis, is offered today because we believe the American people have a right to know, an interest to know, and a need to know.

With that, I reserve the balance of my time.

Mr. Speaker, could I inquire how much time is available.

Mr. Speaker, I won't use all of our time.

I have a slightly different opinion than the ranking member's. I believe regular order has been followed on this bill, followed and then some.

This is something that Dr. Paul has worked on, on a bipartisan basis, with Republican Presidents and Democratic Presidents, with Republican Congresses and Democratic Congresses. The support for this, as you saw here today, goes to Republicans and Democrats, Progressives, Conservatives, Blue Dogs.

The American people want to know. I don't believe the American people are afraid to know. Of course, the American people would not be comfortable with interference with the Fed, with micromanaging policy decisions, with tearing down the institution.

But, in fact, I think that the 9/11 of the financial market, if you will, the meltdown in 2008 and 2009, $1 trillion nearly in TARP money, and countless trillions in expansion of the balance sheet, have taught us one thing: what we don't know can hurt us.

Now, before 9/11 of the financial market, before the meltdown, before Lehman Brothers and Bear, Stearns evaporated, we would have thought, well, there are some very smart people on Wall Street, and we'd have been right. But smart people can be wrong.

We put very good people on the Federal Reserve Board. We choose very good chairmen. Chairman Bernanke was a choice of Republicans and Democrats alike.

But, ultimately, looking over the shoulder by Congress, by my committee, by the Financial Services Committee, just to ask the question, are those numbers undeniable truths brought down on tablets; or are they, in fact, open to second guessing after the fact, questioning of whether or not a model works or whether there is just a small, but meaningful, opportunity for tens of trillions of dollars to fall on the backs of the American people if they got it wrong?

That's the question the American people asked, and after 2008, it's a question Congress must ask.

When Chairman Frank voted for Ron Paul's bill, perhaps he didn't want it, but he voted for it as did countless Democrats. Ultimately, it was reduced--but not eliminated--in conference. There was some recognition that it needed to be audited.

Today, what we are doing is asking to send to the Senate a piece of legislation that more purely and clearly says: I believe the American people have a right to know. Perhaps the Senate will take up a slightly different version. Perhaps it will be truly a one-time audit. Perhaps it will be limited.

The American people need to hold us in the House and our counterparts in the Senate responsible, that we do know what we need to know and that we will never again say we rely on other people to be so smart that we shouldn't look over their shoulders. That's not the America that I grew up in. It's not the clear and transparent America the American people are asking for.

With that, I urge the passage of this bipartisan bill, and I yield back the balance of my time.

Mr. Speaker, for the purpose of inquiring of the schedule for the coming week, I yield to the chief deputy whip.

I thank the gentleman for that information. I appreciate it. I know the majority leader could not be here this afternoon, but he said last week that we should expect legislation on the floor the week of July 30 dealing with the tax questions; in particular, the tax cuts of 2001 and 2003. The gentleman may remember my discussions at that point in time. I don't think decisions had been made.

We are hopeful on this side of the aisle that there will be hearings next week, obviously, because it's going to be the week of the 30th it'll be on the floor, and also there will be a markup of that bill before it comes to the floor. Can you tell us whether or not in fact there will be a hearing on that legislation and also whether, pursuant to those hearings, there will be a markup on that bill?

I thank the gentleman for that information. As the gentleman understands, although they may be well known, the situation that exists today is radically different than existed in 2001 and 2003 when President Bush, who recommended both of those tax cuts, projected a $5.6 trillion surplus, as the gentleman may recall. Unfortunately, that prediction was radically wrong. And when I say radically wrong, in fact, we increased the debt by over $4 trillion rather than have a surplus--a $10 trillion turnaround in the projections.

As a result, I would suggest to the gentleman and his party that the situation confronting us, as I said, is very, very different than it was in 2001 and 2003 when the Bush administration projected those surpluses, which it inherited, of course, from the Clinton administration.

In addition to that, the Republican majority has said that we'll govern based on their pledge to America. Openness in the House is a key part of that pledge that you made.

I want to read you a quote:

``We have nothing to fear from letting the House work its will, nothing to fear from the battle of ideas.''

The Speaker of the House, Mr. Boehner, went on to say:

``That starts with the committees. The result will be more scrutiny and better legislation.''

He said that in October 2010. Of course, it was in the throes of a campaign. But I would hope and I tell my friend very sincerely that that premise prevails today. In light of the change of circumstances, but much more than that, in light of the significant differences between the two parties in the Ways and Means Committee, the transparency and openness to which Speaker Boehner referred, referencing that that would apply in committees as well, would almost dictate that you would have a markup in the committee and give members of the committee the opportunity to vote on that legislation, offer amendments, offer alternatives, and offer their opinions for the consideration of other members on the committee as to the ramifications of the actions proposed in the committee by the majority party.

I would ask my friend if he has a view on whether or not, notwithstanding the fact that the position of the majority is that the subject matter is well known--it is also well known there are differences of opinion on this. And what the Speaker said in his quote was, let that difference be spread across the Record, let Members have the opportunity to express their differences through their vote; and that premise applied to the committees. I would hope that the gentleman could assure us that, in fact, there would be a markup in the committee.

I have talked to Mr. Camp, who is a good friend of mine and for whom

I thank the gentleman for those comments. That is new information for us. I will tell you, please, I would still like to have a markup in the committee, which I think is consistent. No matter how much this has been discussed, there has been no markup of this bill. So while it may have been discussed for a long period of time and while there have been hearings on tax reform, there has been no markup of this bill in the committee, as the gentleman well knows.

But I'm pleased to hear that the minority will be allowed an amendment to be made in order of our choosing to offer on this floor. I think that's a positive sign. I appreciate the gentleman's notice of that, and I will certainly notice our Members of that ability. We're pleased at that.

I will say, however, to the gentleman that I did note the Ernst & Young story. I noticed it was paid for by people who may, absent its conclusions, receive a tax increase to help us bring down the deficit. But notwithstanding that, I was sure we were going to hear about that on the floor. I'm not surprised, and you're not going to be surprised that there will be other studies referenced on the floor as well. So I thank the gentleman for his information, and I'm pleased with that.

As I said, I will note that, in fact, there will be an amendment, and hopefully that amendment will be allowed some significant period of time for debate. That is much superior to the only other alternative that we would have had, which was an MTR 5 minutes on each side. So I thank the gentleman, and I thank the leadership for that information.

Let me ask the gentleman, does the gentleman expect the farm bill to come to the floor before the August break?

I yield to my friend.

I thank the gentleman.

For the gentleman's information, which may help you in determining whether or not you have the votes for the farm bill, I think it fair to say that we would have a majority of our party for the Senate-passed bill which passed, as the gentleman knows, with 62 votes, 12 Members of the Republican Party voting for that bill, 50 members of the Democratic Party. Obviously, it is a significant bipartisan bill. If the gentleman perhaps is talking to Mr. McCarthy, you can convey to him information that if that bill were to come to the floor, we would try to work with you to pass that piece of legislation.

Obviously, there are a lot of farmers in our country who are struggling right now. We have an extraordinary drought in America. They are suffering, they're at risk, and the gentleman talked about certainty. I agree with him on certainty. By the way, because I didn't ask him when he brought it up, does that certainty mean that you would be suggesting that the tax cuts that were in effect in '01, '03 be made permanent?

I yield to my friend.

I thank the gentleman for that answer.

Going back to the crisis that the agriculture community is confronted with by the drought, if the farm bill--and we would urge that the bipartisan farm bill be brought to the floor for consideration to give certainty to farmers, to give some sense to farmers as to what they might rely on in the coming year or coming years; but absent that, the gentleman did not mention, do we have any expectation that we will deal with drought emergency legislation vis-a-vis the farm community prior to our August break?

I yield to my friend.

I thank the gentleman for that answer.

Lastly, Mr. Cantor is not on the floor, but both Mr. Cantor and I have made representations that we are going to work together, as we do from time to time, cooperatively and effectively, I might say. We are very concerned that the Iran sanctions legislation, which is in conference, be passed by this Congress prior to our leaving on August 2 or 3--I'm not sure which days we are going to be leaving, but one of those days.

Does the gentleman have any information on the status of the Iran sanctions legislation which we passed overwhelmingly in this House and the Senate has passed? It's in conference, and I know Mr. Cantor and I both support getting this done before we leave.

I yield to my friend.

I'm very pleased to hear that. I thank the gentleman for that information, and I yield back the balance of my time.

Mr. Speaker, I think this is a bad idea, and I am somewhat confused.

By the way, we will be debating tomorrow a bill which restricts rulemaking, and it exempts the Federal Reserve, as I read it. So we're kind of on again/off again about the Federal Reserve. It seems to me what we're talking about is taking some fake punches at the Federal Reserve but not doing anything serious.

My Republican colleagues brought up a reconciliation bill that was going to subject the Consumer Bureau to appropriations.

So I offered an amendment to subject the Federal Reserve to appropriations. That was voted down. So we're not going to restrict their rulemaking. We're not going to subject them to appropriations, even though that's being done elsewhere. We're going to audit them, which is a way to look tough without really being tough.

I yield to the gentleman from California.

No. I reclaim my time and say we should do none of them. I was saying I have a consistent position. I don't think we should do any of them. What I'm saying is, people who get up there and beat their chest about how tough they are and they're not afraid of the Federal Reserve but exempt it from the great rulemaking bill, and subject the Consumer Bureau--that terrible threat to the well-being of Americans--to the appropriations process, but let the Federal Reserve, which spends about 150 times as much, go free--I am inclined to doubt their seriousness. Not their purity, that would be a violation of the rules, but their seriousness. This is a way to shake your fist at that big, bad Fed. And it's not a good way.

We hear a lot about uncertainty. Remember, the Federal Reserve is now subject to a complete openness about all of its transactions with private companies. We did that last year. The gentleman from Texas had a major role in that. When the Federal Reserve deals with any other institution, we know what it does. We don't know it necessarily the same day. There were these predictions about what terrible things were going to happen when the Federal Reserve did this and that. They haven't come true. Maybe they will some day, but we will know it.

This makes this exception: it says that we will audit the decisions about monetary policy. It says that members who vote on what the interest rate should be will now be audited. They will be subject to being quizzed about why they did that. Now, I will tell my Democratic friends, understand that one part of this problem is the objection on the part of the Republican Party to the fact that our Federal Reserve, unusual among central banks, has a dual mandate. They are charged under our statute to be concerned about inflation and about unemployment.

Now, the Republicans have an agenda they're keeping on low key until next year. They have a bill, but they won't act on it yet. But they would like to strip that part of the mandate. They would like the Federal Reserve to be only involved in inflation. They don't like the notion that the Federal Reserve deals with unemployment, and this is a way that, if it were ever to become law, and no one thinks it will-- this is a, Look how tough we are. We are going to wave our fists at the Fed. But it would be a way to kind of put pressure on members of the Open Market Committee and see, were you worried about unemployment when you did this? That's the audit. This has nothing to do with how they spend their money. It has nothing to do with whom they contract. That is what people usually think about an audit. It doesn't

have anything to do with whether they are efficient or not. It is an ideological agenda by a group of people who didn't like what the Federal Reserve was doing--under, by the way, George Bush, there was reference to the bailouts, which were, of course, under the Bush administration. One of the things that we did, by the way, in our bill 2 years ago--and all my Republican colleagues voted against the bill-- was to take away from the Federal Reserve the power they used--under President Bush--to give/lend $85 billion to AIG. We rescinded that. I don't think Mr. Bernanke, a Bush appointee, was doing the wrong thing necessarily, but we took back that power.

So this is partly a show because on the two serious efforts to curtail the Fed's powers, my Republican colleagues aren't there. But secondly--and as I said, I'm consistent--I don't think that we should do any of these things. I think what we did with regard to openness makes sense. I'm not pretending to be tough when I'm not.

But what it will do is destabilize. We have worries about expectations. There is a fear that we will be too inflationary or that we won't grow enough. People on Wall Street are not as sophisticated as some people think. I don't mean they're not sophisticated about their own business, as we know, but they will read this and take it more seriously than the Members here do who think it might eventually become law, and it will destabilize some of the financial system. They will see it as political interference not with the contracting procedures, not with the budget, not with how many cars they have, but with how they decide on interest rates. And the perception that the Congress is going to politicize the way in which interest rates are set will in itself have a destabilizing effect.

And as I said, nobody here thinks this will ever become law. But there is this fear on the part of others who don't know that that will translate into precisely the kind of uncertainty, precisely the kind of unsettling on investments that my Republican colleagues pretend to fear, and it will also send them the message, stop worrying about unemployment.

Mr. Speaker, to illustrate the misconceptions about this bill, let's refer to what the gentleman from Utah (Mr. Chaffetz) had to say. He said 76 percent of the purchasers of this and that. Well, if they were so nontransparent, I don't know how he would know that. He didn't have a subpoena. But the fact is, yes, he knows that because of the

transparency we've already built in. But all the more important, the details, the specifics of every one of those transactions are already public.

This isn't about those transactions or about with whom they were done and under what time period. It's about the motives of the people setting monetary policy.

And let me address the Constitution. Yes, it is true that the Constitution gives us the power to do this. The Constitution gives us a lot of power. It gives us power to declare war on Canada. It gives us the power to do a lot of things. Wise people pick and choose which powers they use.

But this is not about getting more information about their transactions. All of that is out there. This is an effort to give politicians, a wonderful group of people of which I am one, more direct involvement in the actual decisions on setting of interest rates than is good for the economy.

Mr. Speaker, I'm glad that the Committee on Government and Oversight isn't the

official House historian. In fact, there was a motion to include language like this offered to the financial reform bill. I voted ``no,'' as did Mr. Watt. It was included in the bill. It's true, I voted for the bill. Of course, the gentleman from Texas voted against the bill. So if your vote on the whole bill is taken as an account of what you feel, he was against it.

But when it went to conference, it was not in the Senate bill--which was the text of the conference--so it did not come up, and no Republican conferee offered it as an amendment. That is, in the conference, that language which I and the gentleman from North Carolina voted against was not offered by any Member of the conference, Democrat or Republican.

Mr. Speaker, I rise in qualified support of H.R. 459, the Federal Reserve Transparency Act of 2012. Before addressing the merits of the legislation, I want to pay tribute to its author, the gentleman from Texas, Mr. Paul, who serves as the Chairman of the Financial Services Committee's Domestic Monetary Policy Subcommittee. His tireless advocacy on monetary policy issues and his crusade for a more open and transparent Federal Reserve have been hallmarks of his congressional career. With that career coming to a close at the end of this Congress, it is appropriate that the House consider this bill.

H.R. 459 is bipartisan legislation which will help promote greater public understanding of the Federal Reserve's operations and the impact of its decisions on average Americans. A more transparent central bank will be more accountable for its decisions, which have broad consequences for the American economy, including consumers, savers and small businesses. By de-mystifying the Federal Reserve, we can enhance public confidence in the institution and help address some of the legitimate questions the American people have in the wake of the extraordinary measures that the Fed took at the height of the financial crisis, which have resulted in a tripling of the size of the Fed's balance sheet since 2008.

To his credit, Chairman Bernanke recognized the need for the Fed to improve the transparency of its operations early on in his tenure, and under his leadership, the Fed has made significant strides in this area. Among other initiatives, the Chairman now holds quarterly press conferences, giving the American public an insight into his thinking on the state of the economy and the basis for monetary policy judgments that would have been unheard of under past Fed Chairmen. The Fed has also achieved a greater level of clarity in policy statements issued by the Federal Open Market Committee, and has become much more explicit in its targeting of inflation.

While these are welcome developments for which Chairman Bernanke should be commended, in a representative democracy, maximum transparency is essential to maintaining the trust of the governed. If we err, it must be on the side of the public's right to know. By removing certain statutory limitations on the current authority of the Government Accountability Office (GAO) to audit the Fed's operations, H.R. 459 builds on the reforms that Chairman Bernanke has instituted and will make for a more open and accountable central bank, which is a goal we all share.

Having said that, no legislation is perfect, and there is one aspect of this bill that, if not carefully implemented, runs the risk of undermining the Fed's political independence. Specifically, the bill would authorize the GAO to audit the Federal Reserve Board's ``deliberations, decisions, or actions on monetary policy matters,'' thereby removing a limitation that was imposed on the GAO when it was first given statutory authority to audit the Fed in 1978. Proponents of expanding the scope of the GAO's audit authority cite the unconventional policy interventions carried out by the Fed in recent years in its attempt to stabilize the financial system and stimulate the economy as justification for a more robust congressional role in overseeing the central bank's operations. It should be noted, however, that the inclusion in the Dodd-Frank Act of reforms first proposed by Financial Services Committee Republicans that significantly curtail the Fed's emergency lending authorities under section 13(3) of the Federal Reserve Act go a long way toward addressing concerns about the Fed's ability to conduct rescues of individual financial institutions without the review and approval of Congress.

As a general matter, I worry that the level of congressional scrutiny authorized by H.R. 459 may, if not exercised cautiously and responsibly, be incompatible with the need to insulate the Fed from political pressures and ensure that its decisions are based on sound economic principles rather than on jaw-boning from Capitol Hill. I am therefore sympathetic to Chairman Bernanke's argument--which he made in recent testimony before the Financial Services Committee--that a central bank that operates free of such political influence is likely to produce better economic outcomes and a more stable interest rate environment.

Indeed, the danger of allowing political considerations to guide monetary policy judgments was on full display at a recent hearing in the other body, where one of the Senators, citing Congress' inability to reach consensus on how to jump-start our anemic economic recovery, loudly urged Chairman Bernanke to ``get to work'' and implement a more aggressive monetary easing. This kind of rhetoric underscores the need for the GAO to exercise its expanded audit authority under H.R. 459 prudently, and to resist any efforts by Members of Congress to use this new tool to influence decisions on monetary policy. Failure to protect the central bank's independence from such political pressure will have dire consequences for our economy and for the legitimacy of the Federal Reserve as an institution.

Concerns about the scope of GAO's audits of monetary policy deliberations were never aired in the Financial Services Committee because of a decision by the House Parliamentarian to refer H.R. 459 exclusively to the Committee on Oversight and Government Reform. This referral, which Dr. Paul and I challenged at the time in extensive written correspondence and in meetings with the Parliamentarians, ignored decades of past precedents recognizing the Financial Services Committee's jurisdiction over legislative proposals affecting the Federal Reserve's conduct of monetary policy. While the Parliamentarian ultimately granted the Financial Services Committee a sequential referral of H.R. 459 after it had been reported to the House and scheduled for floor consideration, the initial referral to the Committee on Oversight and Government Reform short-circuited the legislative process and denied Members of the Financial Services Committee, including Dr. Paul, an opportunity to fully debate the important issues of Federal Reserve transparency and independence raised by this legislation.

Again, I commend Dr. Paul and Chairman Bernanke for their efforts to bring greater transparency to the Fed's operations.