By Ryan Ekvall | Wisconsin Reporter
MADISON — The Federal Reserve is approaching its 100-year anniversary. To commemorate the occasion, Congress, including a majority of Wisconsin representatives, would like to throw a surprise party of sorts: They’re calling for an unprecedented audit of the Fed’s books.
“Because of its status as an independent agency, much of the Federal Reserve’s actions are secret and not subject to scrutiny. It is important the agency maintains its independence so that its actions are not influenced by political considerations,” Republican U.S. Sen. Ron Johnson said in an email. “However, regular audits of the Federal Reserve’s operations and balance sheet should be conducted to ensure accountability for prior actions. It is not healthy for any organization to be free from accountability.”
The Federal Reserve System is the nation’s quasi-private bank; the bank itself is private, the overseeing Board of Governors is appointed by the president. The super-secretive central bank is tasked with three objectives: stable prices, maximum employment and moderate long-term interest rates.
The Fed’s critics run the gamut:
- Folks who say the Fed has lost its ability to operate free of political forces;
- Those who criticize the Fed for propping up losers in the 2008 banking collapse;
- Constitutionalists who say Congress had no authority to transfer its responsibility for monetary policy to the Fed;
- Those who decry central banking and fiat currency — money derived from government, instead of the market — altogether.
The Federal Reserve Transparency Act, or House Resolution 459, would “require a full audit of the Board of Governors of the Federal Reserve System and the Federal Reserve banks” by the end of 2012.
Fed Chairman Ben Bernanke calls that a “nightmare scenario.”
The bill’s 272 co-sponsors in the House include Tom Petri, Wisconsin’s 6th Congressional District representative.
“The answer is pretty simple — transparency,” said Petri, a Republican. “The Fed has a central role in our economy, and that in order to maintain its legitimacy and effectiveness, it must have the confidence of the American people. Such confidence will result more from transparency and openness than by continued mystery.”
Democrat U.S. Rep. Tammy Baldwin, of District 2, who is running for U.S. Senate, is a co-sponsor of the House bill.
Baldwin “continues to support robust oversight of the Federal Reserve,” wrote press secretary Jerilyn Goodman in an email.
U.S. Rep. Paul Ryan, R-District 1, was a co-sponsor of a previous Audit the Fed bill, but his office was Fed-like secretive about this version, of which he is not a co-sponsor.
“Definitely something we could circle back about after the vote, will that work?” wrote press secretary Smythe Anderson in an email.
Like the Wizard of Oz, the chairman of the Federal Reserve warns Congress not to pull back its curtain.
“Our concern with Mr. Paul’s bill and similar bills is that the word ‘audit’ is not just a financial term, it is also a policy evaluation term,” Bernanke told the House Committee on Financial Services in a 2010 hearing. “As written, his bill will allow the Congress to ask the (Government Accountability Office) to come in and essentially determine whether they thought the Federal Reserve had made a mistake in its interest rate policy or not.
“We think that would be inconsistent with the very important principle that Congress should not be managing monetary policy, that the Federal Reserve should be independent in making its monetary policy decisions.”
In other words, the Federal Reserve doesn’t want Congress to rate its performance during America’s greatest economic collapse since the 1930s. It argues the effect would be bad for markets.
“When the Fed talks independence, what they’re really talking about is secrecy, not transparency,” said Texas U.S. Rep. Ron Paul, in a House Financial Services committee hearing Wednesday. Paul, an ardent opponent of the Federal Reserve System and Republican author of the bill, has railed against the Fed since joining Congress in 1976.
“It’s the secrecy that I don’t like, and that we have a right to know about,” he said.
In his 1983 book, “The Mystery of Banking,” economist Murray Rothbard described the central bank as “a lender of last resort, a federal governmental Santa Claus who would always stand ready to bail out banks in trouble,” which is precisely what happened during the 2008 crash.
A partial Fed audit in 2011 revealed the Federal Reserve had lent $16.1 trillion worth of emergency loans to banks and foreign financial institutions since 2007. Recipients included Citigroup, $2.5 trillion; Morgan Stanley, $2.03 trillion; Merill Lynch, $1.9 trillion; and Bank of America, $1.3 trillion.
A 2011 review by The New York Times revealed more than 100 banks failed after borrowing from the Fed’s “discount window,” where troubled banks can borrow money from the Fed — in secret, so customers won’t panic.
Since 2007, the Fed has bought more than $2 trillion in Treasury bonds and mortgage-backed securities, which critics say distort interest rates and markets. In 2011, the Fed purchased 61 percent of total net Treasury bonds issued, allowing the federal government to run up the deficit and bail out failing financial institutions.
U.S. Senate candidate Eric Hovde, a hedge fund manager and community banker, has been the most outspoken candidate of Federal Reserve monetary policy on the campaign trail.
“The Fed has played a role in the Internet bubble, the housing bubble — when they held interest rates down to 1 percent and held them there too long. They’re playing a big role in the government spending bubble,” Hovde said, referencing the Fed’s treasury debt purchases.
“They call it quantitative easing. It’s printing more and more money which is devaluing the dollar against all basic necessities: think of food prices, look at base metal prices,” said Hovde.
Hovde’s Republican opponent former U.S. Rep. Mark Neumann also supports the Federal Reserve audit. Former Gov. Tommy Thompson and Assembly Speaker Jeff Fitzgerald, of Horicon, did not respond to requests for comment from Wisconsin Reporter. Larry Goodman, president of the Center for Financial Stability, a New York City think tank on financial markets, said the Fed’s large-scale purchasing of Treasury bonds also hurts retirees and other vulnerable members of society.
Purchasing Treasury bonds “lowers interest rates, which actually penalizes savers and retirees,” Goodman said. “The Fed’s work to purchase treasury bonds has effectively manipulated the price of credit, which is the interest rate. To be sure, people living on a fixed income have suffered in response to this activity.”
“One of the greatest areas of economic strength for our nation has been the separation of responsibilities between the Federal Reserve and the U.S. Treasury. That division is important, when the Fed purchases Treasuries, it’s moving into fiscal policy. It also leads to distortions,” Goodman said.
The nation’s wariness of the secretive central bank has become common ground after the financial collapse, even for the diametrically opposed tea party and Occupy Wall Street populist movements. Some credit Texas Republican and GOP presidential candidate Ron Paul’s 2009 book titled “End the Fed.” A full 80 percent of Americans now support a full audit of the Federal Reserve, according to a 2010 Rasmussen poll.
Even presumptive GOP nominee Mitt Romney appears to have changed his tune on the Federal Reserve. Wednesday night, the presidential hopeful tweeted: “Ron Paul’s ‘Audit the Fed’ bill is a reminder of his tireless efforts to promote sound money and a more transparent Federal Reserve.”
“Sometimes populist notions are justified,” said John McAdams, a political scientist at Marquette University in Milwaukee. “Since the actions of the Fed — and central banks in general — are pretty opaque to the average citizen, it’s easy to believe that they are engaged in nefarious shenanigans. And sometimes there are nefarious shenanigans.”
He pointed to the recent London inter-bank offering rate, or LIBOR, scandal in which the Federal Reserve Bank of New York was aware that major global banks were rigging the rate of borrowing for individuals and businesses throughout the world.
“The Board of Governors of the Federal Reserve are supposed to be like a bevy of Platonic Guardians, with the autonomy necessary to promote the public interest in a disinterested way,” said McAdams. “But, Plato to the contrary, there is never any guarantee that the guardians will not become corrupt.”