The Project to Restore America
What's Next for the Audit-the-Fed Bill?
By Sheldon Richman
Friday, September 28, 2012
The Federal Reserve System's extraordinary, even unprecedented, activities in the wake of the financial debacle that struck in late 2007 has ignited suspicion of America's 100-year-old central bank that goes far beyond its traditional critics among hard-money enthusiasts, and free-banking advocates, and populists.
It's not hard to see why. As U.S. Rep. Ron Paul (R-Tex.) wrote in a 2009 letter to then-Sen. Chris Dodd, "Since 2007, the Federal Reserve has expanded its balance sheet by $1.2 trillion and taken on substantial credit, interest-rate and foreign exchange risk. It has lent immense sums to some financial institutions against overvalued collateral, while refusing to lend to others with no clear standards as to who was rescued and who was not. It has set up holding companies using no-bid contracts, and guaranteed substantial liabilities of Citigroup, all the while keeping information about its actions secret from the public and Congress."
Today the Fed's balance sheet stands at $2.8 trillion, big increase over the less-than $1 trillion before the onset of the Great Recession. Of course, when the Fed buys assets like government bonds or mortgage-backed securities from banks or lends money to financial institutions (on collateral of dubious value), it creates that money out of thin air. Such money creation (other things equal) constitutes inflation and could translate into rising consumer prices, unless the Fed withdraws other money from the economy and/or pays banks to keep their newly created deposits on account with the Fed. To this point, this has been the Fed's policy, though Quantitative Easing III most likely will be different.
But not only has the Fed increased liquidity and bailed out financial companies caught holding toxic assets; it also has taken the unprecedented step of directly allocating credit in the economy. As economist Jeffrey Rogers Hummel of San Jose State University has written, "[Fed Chairman Ben] Bernanke's targeted and sterilized bailouts have altered the fundamental nature of the Federal Reserve. . . . [T]he Fed that emerged from the [housing and financial] crisis is no longer the same as the Fed before the crisis. . . . Most economists appear not to appreciate fully how drastic the changes are that Bernanke has wrought."
The expansion of the Fed's activities--and especially the secrecy--gave rise to Rep. Paul's proposed legislation 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."
In 2010 Paul and then-Rep. Alan Grayson (D-Fla.) first steered an audit-the-Fed bill through the House, which was incorporated into the Dodd-Frank financial-overhaul act. (Grayson lost his reelection bid in November 2010 and is now running again.) Paul came back this year with H.R. 459, the Federal Reserve Transparency Act. (It's Senate counterpart, sponsored by his son, Sen. Rand Paul [R-Ky.], is S. 202.) Why the second effort?
Paul said, "The audit mandated in the Dodd-Frank Act focused solely on emergency credit programs, and only on procedural issues (such as the effectiveness of collateral policies, whether credit programs favored specific participants, or the use of third-party contractors) rather than focusing on the substantive details of the lending transactions. H.R. 459 does not limit the focus of the audit."
What exactly would the bill do? It decrees that "an audit of the Board of Governors of the Federal Reserve System and the Federal reserve banks . . . shall be completed within 12
months of the date of enactment of this Act." Within 90 days of the audit's completion, the Comptroller General must submit a report to congressional leadership, the relevant committees, "any other Member of Congress who requests it." Existing limitations on Fed scrutiny would be repealed.
By July the House bill had 270 cosponsors. On July 25 it passed 327-98, with all but one Republican voting aye. Eighty-nine Democrats did the same.
Among the Democrats supporting the Paul bill was Rep. Dennis Kucinich of Ohio. Who on the day of the vote said, "The Fed creates trillions of dollars out of nothing and gives it to banks. Congress is in the dark. The Fed sets the stage for the subprime meltdown. Congress is in the dark. The Fed takes a dive on LIBOR. Congress is in the dark. The Fed doesn't tell regulators what is going on. Congress is in the dark. It is time for us to bring the Fed into the sunshine of accountability."
Nothing has happened in the Democratically controlled Senate, where Majority Leader Harry Reid controls its fate. (The bill has 31 cosponsors, including Democrat Mark Begich of Alaska.) Ironically, in 1995 Reid felt otherwise about auditing the Fed. "I have sponsored legislation that would call for an audit of the Federal Reserve System," he said back when he supported an amendment proposed by Sen. Brian Dorgan. "I think it would be interesting to know about the Federal Reserve. I think we should audit the Federal Reserve. It's taxpayer's money that's being used there but we don't do that. . . . [T]here is no entity in the world that controls our lives more than the Federal Reserve System. . . ."
Fed Chairman Ben Bernanke says he agrees that the bank should be "transparent and . . . accountable," but said he draws the line at "monetary policy deliberations and decisions," which he claims would be authorized by Paul's bill. "So, in effect," Bernanke said, "what it would do is allow Congress, for example, to ask the GAO to audit a decision taken by the Fed about interest rates, for example. Now that is very concerning because there's a lot of evidence that an independent central bank that makes decisions based strictly on economic considerations and not based on political pressure will deliver lower inflation and better economic results in the longer term."
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