Yes, the headline isn’t at all shocking, but Ben Bernanke has opened his mouth and stuck his foot in it again, this time on “Audit the Fed” which is coming up for a vote in the Senate. Once more Bernanke trots out tired old canards that have been debunked time and time again. So yet again, let’s take a look at some of his arguments and see what he gets wrong.
Argument: The Fed Is Already Audited
“The Fed is already thoroughly audited in the usual sense, by an independent inspector general and by an outside accounting firm (currently, Deloitte and Touche), and the resulting financial reports are made public online. Every security owned by the Fed, up to the detail of the identifying CUSIP number, is also available online. Moreover, the Government Accountability Office (GAO), which does in-depth reviews and analyses (“audits” of a different type) of government activities at the request of Congress, has wide latitude to review Fed operations, including supervision and regulation as well as other functions.”
When most people think of audits, they think of financial audits. Bernanke attempts to use that to confuse people as to the purpose of Audit the Fed. The Federal Reserve Board has been required for over a decade to have an outside auditor audit its financial statements. Per 12 USC 248b:
“The Board Shall order an annual independent audit of the financial statements of each Federal reserve bank and the Board.”
But Bernanke’s assertions mislead in three ways.
- Audits of financial statements are not audits of the entire Federal Reserve System and all of its operations and transactions, they are necessarily limited.
- The outside auditor is appointed by and answers to the Federal Reserve Board, i.e., the entity being audited.
- The Fed Inspector General is appointed by and responsible to the Chairman of the Board of Governors of the Federal Reserve System, again, the head of the entity being audited.
As per the Inspector General Act, as amended:
5 USC Appendix 8G(c):
For purposes of implementing this section, the Chairman of the Board of Governors of the Federal Reserve System shall appoint the Inspector General of the Board of Governors of the Federal Reserve System and the Bureau of Consumer Financial Protection.
5 USC Appendix 8G(d)(1):
Each Inspector General shall report to and be under the general supervision of the head of the designated Federal entity, but shall not report to, or be subject to supervision by, any other officer or employee of such designated Federal entity. Except as provided in paragraph (2), the head of the designated Federal entity shall not prevent or prohibit the Inspector General from initiating, carrying out, or completing any audit or investigation, or from issuing any subpena [sic] during the course of any audit or investigation.
Basically what Bernanke is saying is, we can audit ourselves if we want to, so just trust us that we’ve investigated ourselves and found ourselves fully trustworthy. Sorry, but that just doesn’t cut it. Nemo judex in causa sua – no one should be a judge in his own case. To expect that an outside auditor or the Fed’s IG, who serves at the Chairman’s pleasure, will do anything that might displease the Chairman is absurd. If the Fed wants to be taken seriously as a transparent federal entity, it needs to allow Congress, and specifically Congress’ watchdog, the Government Accountability Office (GAO), to fully audit the Fed’s operations. As GAO states:
Our Work is done at the request of congressional committees or subcommittees or is mandated by public laws or committee reports. We also undertake research under the authority of the Comptroller General. We support congressional oversight by
auditing agency operations to determine whether federal funds are being spent efficiently and effectively; investigating allegations of illegal and improper activities; reporting on how well government programs and policies are meeting their objectives; performing policy analyses and outlining options for congressional consideration; and issuing legal decisions and opinions, such as bid protest rulings and reports on agency rules.
The full audit called for by Audit the Fed would necessarily include not just a financial audit (if that were determined to be necessary), but performance and operational audits as GAO is accustomed to carrying out. Remember that when the bill that allowed the very limited auditing of the Federal Reserve System was first being debated, GAO testified that it could not fully audit the Federal Reserve System without access to the Fed’s monetary policy and open market operations (emphasis added):
H.R. 2176 provides that our auditing would not include open market transactions conducted by the Federal Reserve System. We strongly suggest that this restriction be modified.
The open market transactions are the largest category of financial transactions carried out by the System. During the calendar year 1976, for example, outright purchases of U.S. Government securities and Federal agency obligations totalled over $20 billion. At December 31, 1976, the Federal Reserve banks had on hand over $100 billion in such securities–an increase during the year 1976 of nearly $10 billion. These securities represented about 80 percent of the combined assets of the twelve Federal Reserve banks.
In addition to the large volume of transactions in Government securities, the Federal Reserve System also has very sizable purchases and sales of foreign currencies. These transactions are also carried out through the System Open Market Account under authorizations and directives of the Federal Open Market Committee. For calendar year 1976, for example, foreign currency purchases amounted to about $900 million. At the end of the year, the System held $170 million equivalent in such currencies.
We do not see how we can satisfactorily audit the Federal Reserve System without authority to examine the largest single category of financial transactions and assets that it has.
It is our understanding that the restriction in the bill that we would not audit monetary policy deliberations and open market transactions grows out of concern that our auditing would somehow undermine the independence of the Federal Reserve System with respect to its monetary and credit operations and damage the Nation’s monetary policymaking system. Needless to say, as we have testified on previous occasions, we do not concur in this view.
Should the Congress wish to restrict our auditing to take into account this concern, one restriction that could be written into the law–and the Comptroller General has gone on record on this before–would be to specifically provide that our audit reports to the Congress or its committees shall not contain conclusions or recommendations with respect to the economic effects (as opposed to the efficiency and economy) of open market and discount operations. We would have no objection to a restriction of this kind and we would be glad to work with the committee to draft appropriate language to cover it.
A full audit as called for by Audit the Fed is not just a financial audit, it encompasses performance and operational audits. The Fed has escaped full-scale auditing for its entire existence. With a balance sheet of $4.5 trillion, it is well past time for a thorough accounting of its actions to Congress. A full Federal Reserve audit is even more pressing now than it was 40 years ago.
Argument: Congress Wants To Audit Monetary Policy Decisions Immediately
The principal effect of the bill would be to make meeting-by-meeting monetary policy decisions subject to Congressional review and, potentially, Congressional pressure. The bill would do this by repealing existing restrictions, imposed by Congress nearly forty years ago, on what the GAO can examine when reviewing the Fed. The most important such restriction blocks the GAO from reviewing “deliberations, decisions, or actions on monetary policy matters,” as well as “discussion or communication among or between members of the Board and officers and employees” related to such deliberations. The repeal of the existing restrictions would accordingly allow the GAO to view all materials and transcripts related to a meeting of the Fed’s Federal Open Market Committee (FOMC) at essentially any time and require the GAO, at Congressional request, to provide recommendations on monetary policy, including potentially on individual FOMC interest-rate decisions.
In response to Chairman Bernanke’s assertions at the time Audit the Fed was first being debated, Congressman Paul wrote a letter to the Chairman offering to discuss how the language of Audit the Fed could be modified to assuage his concerns. A letter was sent through the mail, and I hand-delivered a copy to Federal Reserve General Counsel Scott Alvarez after he testified before the House Financial Services Committee, asking him to present it to Chairman Bernanke since Dr. Paul had not received any response from the Fed. We never did receive a response, yet we still tried to modify the language of the bill to provide that audits of the Fed could not deal with anything less than six months old. It’s one thing for Bernanke and the Fed to object that Congress could look over the Fed’s shoulder the day after. But when the sponsor of Audit the Fed offers to work with the Fed to change the language to address their concerns and receives no response, you have to assume that Bernanke’s argument isn’t showing genuine concern about the bill’s language but is rather an attempt to quash the bill and ensure that the Fed’s operations remain in the shadows. If the Fed isn’t willing to negotiate, you have to assume that their arguments aren’t being made in good faith.
Argument: Congress Wants To Undermine The Fed’s Independence
However, this goal is not best achieved by overturning longstanding practice and effectively inserting Congress and the GAO into monetary policy decisions, calling into question the Fed’s independence. The risk is that GAO reviews and recommendations concerning individual monetary policy decisions would provide a vehicle for members of Congress to apply political pressure on the Fed.
I am also confident that political interventions in monetary policy decisions would not lead to better results. But increasing the likelihood of such interventions is precisely the risk presented by “Audit the Fed.”
Audit the Fed’s original sponsor, Congressman Ron Paul, has no desire to see Congress involving itself in monetary policy at all, and he has a 30-plus year track record of trying to get the government out of the monetary arena. As far as I know, the bill’s current sponsor, Senator Rand Paul, also has no desire to see Congress meddling in monetary policy. Both of them would like to see the government, both Congress and the Fed, out of dictating monetary policy at all. But absent the abolition of the Federal Reserve System and an understanding on the part of Congress that monetary policy is harmful to the economy, the fact remains that the Federal Reserve does engage in monetary policy. And as long as the Fed does engage in monetary policy, should its operations not be open to and accountable to Congress and the American people? This bill is really just about openness and transparency of those monetary policy operations. Ben Bernanke, Janet Yellen, and their fellow travelers in Washington, DC realize that, but they don’t really want transparency. If Congress really wanted to involve itself in the day to day dealings of monetary policy, it could draft a bill to do just that. But Congress hasn’t done that and Audit the Fed wouldn’t authorize that either.
Remember how it took a lawsuit filed by Bloomberg against the Federal Reserve’s Board of Governors to find out who exactly the Fed was loaning money to during the financial crisis. The Fed will fight against transparency tooth and nail. We can only hope that the Fed will continue to lose its fight against transparency and that Audit the Fed will eventually become the law of the land. If Bernanke, Yellen, et al. are really serious about having their concerns addressed, they should discuss with the bill’s sponsors the adoption of language assuaging some of their stated concerns. Otherwise, their arguments should be dismissed as just another attempt to escape responsibility and ensure that Congress and the American people remain unaware of what the Fed is up to.
Image: Medill DC