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.
May 6, 2010; 9:46 AM ET
Categories: Federal Reserve
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