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Should we 'Audit the Fed'?


Right now, the Government Accounting Office is supposed to keep an eye on the Federal Reserve. But there's a lot the GAO simply isn't allowed to see. As Sudeep Reddy explained, "the GAO can't review most of the Fed's monetary-policy actions or decisions, including discount-window lending (direct loans to financial institutions), open-market operations and any other transactions made under the direction of the Federal Open Market Committee, the policy group that sets interest rates. The GAO also cannot look into the Fed's transactions with foreign governments, foreign central banks and other international financing organizations."

Hence the push to add language to financial reform that would allow us to "Audit the Fed." The House has already passed a bill along those lines, and Bernie Sanders is expected to bring a similar amendment up for debate in the Senate. The Federal Reserve isn't too happy about this, and is lobbying hard against it. Dean Baker explains their two main argument, and why he's not convinced:

The first argument the Fed is giving is that this would create a stigma for the banks, I’m kind of at a loss to understand what they even mean. They can give an argument that if you have a banking crisis and Bear is about to meltdown, and they suddenly need money from the Fed, and there’s this public statement saying that Bear went running to the Fed and borrowed 5 billion, that puts Bear in big trouble and a bank run could start.

But we’re talking about a year and a half, two years later. So I don’t understand how that creates a crisis. Does that create a stigma, that the banks were in trouble? Well maybe, but I’m not sure why we should care. The fed is not in the business of covering up banks’ bad financial shape. The principle we want is transparency. If they know a bank’s in trouble, again we don’t want to create a run, but after the fact the Fed should be making the banks’ condition more transparent, not helping them conceal it, as they did with Lehman for many months,.

So this stigma story I don’t quite understand. The other argument is this would hurt their independence. But again, I just don’t see any legitimate meaning of that term, independence, that it interferes with. We want them to make what they think are the best calls. But after the fact, do they have to answer for it? Should they have to say that these are the calls we made, this is why we made them? Absolutely.

My sense, however, is that this fight is more about principle than about policy. Auditing the Fed wouldn't change much, at least not directly, The Federal Reserve folks, however, are worried that it'll open the door to further attacks on their independence, so they're fighting it as if it was an attack on their independence. Many in Congress, conversely, are a bit shocked that the Federal Reserve is being this secretive and resistant to oversight, and so they're fighting for the policy as if it was a more substantial reform of the Fed.

Photo credit: Andrew Harrer/Bloomberg.

By Ezra Klein  |  May 6, 2010; 9:46 AM ET
Categories:  Federal Reserve  
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Next: Tom Toles gets a look at the Democratic playbook


"Auditing the Fed wouldn't change much, at least not directly"

Would the way you took a shower change, if you knew you were going to have an audience? Would your propensity to crank up the Led Zepplin and sing off-tune in the car be muted if your colleagues were all car-pooling with you?

Auditing would prompt the Fed to make both better decisions, and possibly some decisions that weren't great, but would look a lot better in public than the better, but intentionally embarrassing decision, they might have made in private. But, on the whole, I think they'd be a lot less likely to make decisions that seemed to outrageous favor friends and colleagues while refusing to hold bad actors accountable. They'd probably pay more attention to potential signs of impending economic doom.

On the whole, I think it might change a few things.

Posted by: Kevin_Willis | May 6, 2010 10:11 AM | Report abuse

OF COURSE it should be audited.

We are insane not to.

The real question is whether the results (any or all) of the audit should remain secret or not.

If the audit results indicate corruption or criminal activity or systemic incompetence, then the results should be made public.

However, if the Fed is working as intended and is free of corruption/etc, then the auditors should release a report saying so, perhaps with a certain amount of details. This would help Americans to become more confident in, and comfortable with the Fed, Wall Street, and the economy as a whole.

A panel of appropriately qualified, respected, and independent career professionals (no politicians) should be appointed to do the job. These people should be given the power to look in every nook and cranny of the Fed and should not be beholding to the Fed or its members in any way. The final report can then be given to the President and the financial committee leaders of Congress for determination of which details are to be released to the public.

Posted by: Lomillialor | May 6, 2010 10:12 AM | Report abuse

The information about Fed transactions with specific banks would be used by competitor banks, speculators and "market makers" to gain further advantage over the system.

As an independent agency of the government, my inclination would be to make sure the Fed stays neutral and keeps confidences regarding transactions with individual lenders.

WOuld an audit tell us if Goldman Sachs (for example) had private Fed information that allowed them to prosper off the collapse?

Posted by: rowens1 | May 6, 2010 10:16 AM | Report abuse

There is really a fine line between independence and accountability. Or let me go over board and say the separation is 'gray area'.

No matter how many brilliant Bernankes sit on Fed, these are facts:

1. Despite there being internal debate about 'housing bubble' Fed refused to identify the bubble earlier. (Ref. look at Krugman criticism of Bernanke Speech in Atlanta at the start of the year.)

2. Greenspan as the Fed head actively encouraged folks to embark upon 1 year ARM publicly. It matters less that he might have cautioned in past. What matters is at crucial times, he poured 'oil on the fire'. It was an irresponsible act of enormous consequences.

3. Go talk with Bernanke's teacher - Fischer - re-appointed head of Israeli Central Bank and even he along with many other top heads in the world will argue that Fed indeed kept interest rates low for long (Greenspan did that whereas Bernanke was late to the 'fire fighting' Fed mode by at least 6 months...).

Given all that, there is simply no ground for Fed to zealously protect their so called 'independence'. Fed is like an irresponsible board of a company which has squandered its freedom bringing all the calamity upon us. Simply there is no 'political' argument for Fed to drag it's feet here.

And to Matt's argument, that is another difference in Fed and our Imperial Supreme Court - Imperial Supreme Court like Roberts can fundamentally 'screw' us as much as they want (Citizen United); but our Constitution protects them and ensures we Americans are mere consequence bearers. We have enough of that, we do not want to be played by yet another institution here i.e. Bernanke Fed and hence we need GAO looking into Fed books.

Posted by: umesh409 | May 6, 2010 10:36 AM | Report abuse

American Economics is a world power in itself. The details of the Fed's dealings with foreign countries should be kept very secret. Do you think we "lend" money at different rates to different countries for different reasons? It's tough to keep them accountable, secretive and powerful. Allowing the GAO to look into thier books will just meld them together, growing everything. After that, we can create a new agency that checks the GAO. Why don't we just say the President is accountable for The Fed and leave it at that?

Posted by: Holla26 | May 6, 2010 11:16 AM | Report abuse


rowens1:The information about Fed transactions with specific banks would be used by competitor banks, speculators and "market makers" to gain further advantage over the system.

This is a systemic problem, not an issue with the fed. Rampant speculation and derivative instrument creation to hedge banks and currencies that the creators have no interest in is a plague on the global financial markets that almost killed the world economy. "market makers" are actually market predators and scavengers, creating and feeding off of failures that they created.

Tax payer money is our money. We deserve to know who got what from the fed. This is not realtime information, its 2 years old, so the effect on institutional integrity is minimal. We know who got tarp money. Why can't we know who got part of the 2 trillion that the fed lent at basically 0% interest? Independence without accountability is a recipe for cronyism, market distortion, and waste. I want to know how much the companies got when they gave out the multimillion dollar bonusus, and golden parachutes.

Why exactly has no one gone to jail or even been fired and publicly shamed after a small group of investment banks and hedge funds gutted the world economy?

Posted by: srw3 | May 6, 2010 11:23 AM | Report abuse


What is your solution to those problems?

How would an audit and/or the loss of the Fed's independence have changed what the Fed did/said in public (housing is okay, 1yr ARMs are okay, interest rates need to be kept low)?

I only see two solutions if Fed independence is a problem - give control of monetary policy to politicians or to markets.

Posted by: justin84 | May 6, 2010 11:28 AM | Report abuse

Fed independence is not the problem. Fed accountability is a HUGE problem. I understand why we can't have real time updates from the fed but a retrospective analysis of what the fed does after 6 months or a year is imperative to avoid the appearance of impropriety and to allow taxpayers to know where their money is going. People may want to allocate money to different priorities when they learn how much 0% interest money the fed is loaning.

Posted by: srw3 | May 6, 2010 11:33 AM | Report abuse

The fed is not in the business of covering up banks’ bad financial shape. Someone isn't paying attention, that's all the fed has done.

Posted by: obrier2 | May 6, 2010 11:44 AM | Report abuse

Actually, Ezra, the GAO stands for the Government Accountability Office, not Accounting.

It's been changed for years...c'mon, Ezra, this many factual errors in the last 48 hours is unlike you!

Posted by: phantasypunk | May 6, 2010 11:53 AM | Report abuse

I don't understand how anyone could, in good faith, question the need for a Fed audit process.

First of all, the Fed prints and loans money that taxpayers are liable for. Why we should allow a quasi-governmental entity to do this in secret, with no checks and balances is beyond me.

Second, we are pretty certain, based on Bernanke's refusal to answer questions in his Congressional testimony, that the Fed loaned mountains of taxpayer dollars to financial institutions, on or around the 2008 crash. These loans and their terms are entirely opaque, and were made outside the terms of TARP. Because of this, most US citizens believe that the extent of the financial crisis was much smaller than it actually is.

Third, the secrecy of Fed loans to the giant banks abets fraud and unaccountable actions by large financial institutions. Auditing the Fed is much more about shedding light on the dealings of big banks than it is about the Fed's direct actions.

Fourth, we already know that the Fed hasn't been doing its job. Auditing needn't be limited to watching financial transactions. How about verifying that the Fed is doing its job as a regulator? How about putting checks and balances in place so that another bubble doesn't inflate and burst, to the detriment of average taxpayers?

Finally, for the benefit of the hand-wringers who fear that disclosure of Fed actions could harm our cherished open markets, consider 3 things: (1) Auditing and publicly disclosing audit results are 2 different things - if government regulators have access to more details than the public has, that's still better than the situation we have today; (2) Disclosure of some sensitive information can be delayed, to avoid market impact; and (3) what's "open" about a market that's based on incomplete or manipulated economic data? I'd much rather invest based on full knowledge of a bad situation than some fabricated edifice of lies and half-truths cooked up by fat cats at the Fed.

Posted by: jimol | May 6, 2010 11:57 AM | Report abuse

What jimol said, with a bullet...

Posted by: srw3 | May 6, 2010 12:19 PM | Report abuse

My guess is that if we really "audit the fed" and not just look at what happened with TARP but what has happened over the past 10 years, we might find that our debt situation would resemble that of Greece.

Posted by: awktalk | May 6, 2010 7:31 PM | Report abuse

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