Additional Fed Audits Will Not Threaten Monetary Policy

Congressman Ron Paul’s bill to audit the Federal Reserve, HR 1207, seems to have generated quite a bit of concern amongst the Fed that monetary policy would somehow be jeopardized by its passage. In recent congressional testimony, Fed Vice Chairman Donald Kohn stated that “permitting GAO audits of monetary policy also could cast a chill on monetary policy deliberations”, meaning that members of the Fed Open Market Committee (FOMC) and other committees might be more reluctant to openly discuss ideas in private if the actual discussions were subject to congressional scrutiny, and not just the final conclusions of the discussions such as target interest rates.

How justified are the Fed’s concerns? Would passage of HR 1207 somehow threaten the Fed’s independence with respect to conducting monetary policy? To begin with, the tools the Fed has at its disposal to conduct monetary policy, such as open-market operations, reserve requirements and the discount window, are codified in Title 12 of the U.S. Code, whereas HR 1207 would only amend Title 31 of the code. None of the legal provisions which authorize the Fed to conduct monetary policy would be altered in the slightest if HR 1207 is to be passed in its current form, and those provisions maintain a degree of independence for the Fed by not requiring its Board of Governors to obtain congressional approval for adjustments in the conduct of monetary policy.

But Mr. Kohn hinted that additional audits of the Fed might implicitly force its members to focus more on short-term gains, rather than on sound long-term monetary policy, without expressly changing the Fed’s legal authority to conduct monetary policy. In Mr. Kohn’s statements, he indicates that members of the FOMC might be reluctant to express ideas freely in private sessions, if those members are aware that their remarks might be later revealed to the GAO and the Congress, and that could have the effect of preventing meaningful ideas from being expressed which lead to sound policy. This is a most curious observation, since during the hearing Mr. Kohn acknowledged that the Fed is obligated to pursue the goals established for it by Congress. If members of the Fed are genuinely focused on those goals, should not their remarks in private sessions reflect those goals? Of course members might disagree on the best course of action to reach those goals, balancing short-term and long-term objectives, but given that the results of monetary policy are publicly announced and columnists from the Wall Street Journal and other publications frequently comment on the potential ramifications of the Fed’s actions, any member of the Fed who is qualified to hold such position should have to fortitude to stand by their remarks. By comparison, in addition to Supreme Court decisions being publicized, many opinions delivered by Supreme Court justices concerning its decisions have offered glimpses into how certain justices perceive the law, but those revelations have not threatened the Court’s independence.

It is more likely that the Fed is using concern over monetary policy as a distraction, to prevent the curious eyes of Congressman Paul from discovering which institutions the Federal Reserve has been bailing out through its emergency loan program. The Fed’s bailout program is not granted by the Congress in the Federal Reserve Act, and raises questions about how the Fed is conducting itself in all areas. While it is true that the central bank should have a measure of political independence to ensure long-term prosperity, Mr. Kohn failed to mention the effect HR 1207 would have in allowing Congress to discover which banks the Fed has been favoring – either he is somehow unaware of that implication, or the omission was deliberate. Furthermore, during his entire oratory about how the Fed has increased its transparency, Mr. Kohn apparently “forgot” about how certain senators have inquired to Fed Chairman Ben Bernanke concerning which banks have received the bailouts – with no response from Mr. Bernanke. Congressman Paul’s proposed bill would do nothing to remove the monetary policy tools available to the Fed under Title 12, and given concerns over the recent bailout activities it is prudent that the additional audits occur.

Geithner should be upset with himself, not regulators

According to the New York Times, Treasury Secretary Tim Geithner held a meeting last Friday with top regulatory officials (http://dealbook.blogs.nytimes.com/2009/08/04/geithner-said-to-lose-his-cool-at-regulators-meeting/?scp=2&sq=geithner&st=cse). According to the article, Mr. Geithner is upset because President Obama’s financial regulatory reform is encountering resistance among regulators, including the plan to expand the Federal Reserve’s powers. The article states that “Mr. Geithner told attendees that the administration and Congress set policy”.

To begin with, the regulatory policy established by Congress and past administrations specifically give regulators a measure of independence from Congress and the White House. For example, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) each have five commissioners, of which not more than three may be of the same political party by law. Additionally, the laws which grant the SEC and CFTC authority also grant those agencies power to establish regulations in certain areas, without prior approval from Congress or the White House. So, not only is Mr. Geithner’s assessment not compatible with the traditional U.S. law, he is assuming far too much power because the Congress HAS NOT passed President Obama’s regulatory reform measures – for which Mr. Geithner was undoubtedly the key author. And with tirades such as those, growing public mistrust with the Federal Reserve, and Mr. Geithner's previous toxic asset plan, it is more and more likely that Mr. Geithner’s agenda will not receive congressional support.

Additionally, Mr. Geithner himself is jointly responsible for the atmosphere in which regulators are pessimistic about his new reforms. Senator Bernie Sanders, an independent from Vermont, has stated on numerous occasions that the Federal Reserve has loaned at least $2.2. trillion to banks, without permission from the Congress or president. And Ron Paul, a Republican from Texas, has received tremendous support for his House bill to audit the Fed. Because it is likely that those loans began while Mr. Geithner was head of the New York Fed, Mr. Geithner at least implicitly gave his approval of those loans which have given free money to bank executives without freeing the credit markets. And now his reform plan includes expanding the powers of the Federal Reserve, at the same moment when Congress is pressing the Fed to release disclose who received the loans and demand additional accountability by auditing the Fed.

The article also states that “Ms. Schapiro (chairwoman of the SEC) and Ms. Bair (chairwoman of the FDIC) have argued that more authority should be shared among a council of regulators”. Considering that the Federal Reserve has no regulatory authority to assist commercial banks which are near insolvency, such power is instead given to the FDIC, it would seem that Ms. Schapiro and Ms. Bair should be demanding that Mr. Geithner uphold the laws which have been passed by Congress and prior administrations and that Mr. Geithner and the Federal Reserve cease interfering with their respective agencies. The bailout policies which began with the Federal Reserve while Mr. Geithner was leading the New York Fed are not only legally questionable, but have also been an unmitigated disaster – this is why Mr. Geithner should be upset with himself and not with other regulators. Or perhaps he realizes how liable he is for the present situation, and is seeking to shed culpability inasmuch as possible.