THE FEDS SHOULD BE MORE TRANSPARENT

The continuing financial crisis has made clear to many people the deep problems that exist within our financial system. One of the key decisions to be made in any of the reform proposals floating around deals with the Federal Reserve System and its powers.

For nearly 100 years the Federal Reserve has operated largely in the shadows. The Fed’s monetary policy operations, including open-market operations and agreements with foreign governments and central banks, are exempt from audit by the Government Accountability Office.

Congress itself never delves into these areas in the limited time it has during the Fed chairman’s semiannual appearances before the House Financial Services Committee, and any pointed questions are evaded. Former Fed Chairman Alan Greenspan was adept at this — his “Greenspan-speak” was legendary — but Chairman Ben Bernanke is no slouch, either, at giving vague and nonresponsive answers to direct questions.

While I oppose giving the Fed any additional power, even members who support an expansion should support dealing with the crucial issue of Fed oversight — before proposals for giving the Fed additional power as a regulator of the financial system are discussed. Using Section 13(3) of the Federal Reserve Act, the Fed has gone on the warpath over the past two years. It has involved itself in direct financial support to individual firms such as Bear Stearns and American International Group, has developed new credit facilities to funnel money to numerous other financial companies and has boosted its balance sheet to more than $2 trillion — secure in the knowledge that the legal blocks put in place in 31 U.S.C. 714 to prevent GAO audits of the most significant of the Fed’s actions will hide it from any serious oversight. For an organization with arguably as much clout as the rest of the federal government put together to be able to escape significant oversight is a situation that needs to be rectified immediately.

This is why I introduced H.R. 1207, the Federal Reserve Transparency Act, earlier this year. I introduced similar bills in the early 1980s, but they never received nearly the attention that H.R. 1207 has. For this, we have the Federal Reserve’s actions to be thankful for. More Americans than ever are now aware of the powers that the Fed has and the extent to which it is using them. In some recent polls, 75 percent of Americans supported an audit of the Federal Reserve, which is what H.R. 1207 would do. All restrictions on GAO audits of the Fed would be lifted, and all of its books would be fair game.

Not surprisingly, the Federal Reserve is opposed to H.R. 1207. One of the most often heard arguments is that opening monetary policy operations to a GAO audit would erode Fed independence. Nothing could be further from the truth. An audit of the Fed has one main goal, and that is to find out how much money is being spent and who is receiving it. Congress already dictates monetary policy to the Fed in the guise of the Humphrey-Hawkins mandates of full employment and price stability, so the Fed’s vaunted independence is already compromised in that regard. Nothing in the audit called for by H.R. 1207 should be construed as leading to increased congressional interference in or dictation of monetary policy.


Another argument the Fed has trotted out is that an audit would erode trust in the central bank and raise borrowing costs for the Treasury. An audit could only erode trust if the Fed had in fact been up to no good. If the Fed acts in good faith and with the interest of the American people in mind, it should have nothing to fear from enhanced transparency.

However, trust in the Fed from our foreign creditors has been waning for a while, and ongoing secrecy on the Fed’s part continues to erode that trust. For far too long our government has spent far too much and issued debt to fund its profligacy. Our creditors understand this and are reluctant to invest any further until they can be assured that the Fed will stop pursuing policies that devalue the dollar.

A final argument that the Fed uses is that publicizing the names of firms that receive financial assistance could lead to investors selling those firms’ stock and potentially cause the firms to collapse. In fact, it has been shown that the stock prices of firms receiving bailout funds actually improve. As misguided and wasteful as bailouts are, the firms that receive them are viewed by many investors as “winners,” at least temporarily. Even if bailed-out firms eventually collapse, the bailouts signal that the government will not let them collapse in the near term, which allows investors to remain invested in the companies and continue to profit from movements in the stock price.

There really is no viable reason to continue to withhold from the American people the names of firms receiving Federal Reserve assistance and the amount of money they receive. The Treasury Department has been relatively transparent in publicizing the disposition of bailout funds and the terms of agreement it signs, so why should the Federal Reserve be any different?

The march toward financial services reform seems to be inevitable at this point. Whatever legislation is passed in the next year will create a new financial system framework that will very likely remain in place largely unchanged for decades to come. It is absolutely imperative that we get a detailed look at all of the Federal Reserve’s past actions and ensure that any future government intervention into markets is fully and completely transparent.