Skip to content


The Fed’s "Independence" Argument Is False

The House has passed a bill to audit the Federal Reserve. 79% of the American people support a full audit.

In response, the Fed says that an audit would interfere with its “independence”.

However, the Constitution does not empower a central bank, and Congress – which created the Federal Reserve in 1913 and which has the power to create credit and money – certainly has the power to audit, dissolve, or do whatever it likes with the central bank (including stripping it of the power to create credit).

I have previously pointed out that the the independence argument is a red herring.

And I have previously demonstrated that the Fed has done a terrible job of managing the economy, keeping unemployment low, and regulating banks.

Now, in an interview this weekend with Der Spiegel, Paul Volcker – while trying to support the Fed’s argument for independence – actually undermines it:

SPIEGEL: Lawmakers on Capitol Hill are thinking about tougher controls over the Federal Reserve.

Volcker: I think the loss of independence and authority of the Federal Reserve would be a very serious matter for the United States. Not just in terms of monetary policy but in terms of our place in the world. People look to strong, credible institutions and I think the Federal Reserve has been such an institution. If that’s lost or too hamstrung by legislation I think we will regret it.

SPIEGEL: But is the Fed still the same kind of institution as during your tenure as chairman? Or is it now more of a governmental instrument? The Fed is managing the TARP program and is also buying government bonds.

Volcker: In some sense the Federal Reserve is always an instrument of the government. It is a government body but it is independent within government. But you are right in the sense that part of the concern is that they have involved themselves quantitatively in entering markets and in that process, you are supporting some markets and not others. That is an area in which the Federal Reserve has never wanted to get into and one that most central banks don’t want to get into. If you are going to maintain your independence you have to avoid that. To intervene in particular sectors of the market is not the proper role for the central bank over time. It could be justified only by extreme emergency.

Intervening and supporting some market players (Goldman, AIG, etc.) and not others (Lehman, etc.) is precisely what Bernanke has been doing. Whatever can be said for the Fed in the past, picking winners and losers is “not the proper role for the central bank”, in Volcker’s words. Without an audit, we will never know which “winners” were saved and which “losers” were left to die, or why. Nor do we really currently know which bailouts and other actions were truly performed under emergency conditions – to stave off catastrophe – and which were done to help out financial companies for other reasons.

Moreover, Bernanke gave many billions to private foreign banks and foreign central banks (and see this). Has the Fed been picking winners and losers among countries? Among private banks?

As former Federal Reserve economist William Bergman wrote (he sent me this by email; it was previously published in article form, but is not available on the Web):

One of the principal laws governing audits in the Federal Reserve was passed in 1978, the Federal Banking Agency Audit Act. This law established audit authority in the Comptroller General of the United States, who leads today’s General Accountability Office (GAO). The GAO conducts audits and surveys for a wide range of Federal Reserve activities, with over 100 conducted since 1978. Audit authority also resides in the Federal Reserve Board’s Office of Inspector General, who can audit Board programs as well as Reserve Bank operations when carrying out functions delegated by the Board.

The Federal Reserve’s financial statements are audited every year. The Board of Governor’s financial statements are audited by an independent auditor selected by the Board’s Office of Inspector General. The Reserve Banks’ statements are also subjected to outside audits, conducted by firms retained by the Board of Governors. These latter audits must have been an interesting exercise this year, given the massive expansion in Reserve Bank balance sheets in 2008. In turn, more generally, the Board of Governors conducts a wide range of reviews of Reserve Bank operations as part of its mandated oversight authority.

In this brief review of the Fed audit landscape, it’s worth noting that things haven’t always been this way. From the early 1930s to the early 1950s, for example, one of the shoes was on the other foot, as audit teams from the Reserve Banks examined the Board of Governors books. The GAO was actually precluded by law, law passed by Congress, from audit responsibility for the Fed, at least until the 1978 act referred to above. The main lesson here is that the structure of reporting and audit authority has changed in the past, and it can change again in the future.

But today, authority for auditing the Fed is in place. So why do so many people think we need an Audit the Fed Act?

Well, for one thing, the appearance of extensive auditing authority doesn’t mean audits are effective. Good auditing requires the willingness and ability of auditors to do their jobs. Some people view the Inspectors General, generally, and the Federal Reserve Board’s Office of Inspector General, specifically, as less than effective or independent in pursuing their mandates. In turn, some people question whether the Board’s oversight of the Reserve Banks, including the Federal Reserve Bank of New York, might be less than arms-length. More fundamentally, from the point of view of the supporters of the recently introduced legislation, there are a variety of restrictions on the ability of the GAO to audit the Fed. There are significant exceptions for monetary policy and transactions with foreign central banks and international organizations like the Bank for International Settlements and the IMF. The law proscribes GAO inspections of ‘deliberations, decisions, or actions on monetary policy,’ for example, as well as ‘transactions made under the direction of the Federal Open Market Committee.’ The proposed legislation under H.R. 1207 and S. 604 would remove those exceptions.

Why are the exceptions there in the first place? Well, a widespread mantra has it that Federal Reserve independence is crucial in allowing it to effectively pursue the statutory goals of maximum employment and stable prices. If we let politicians start mucking around in that arena too much, Fed leaders and supporters stress, we aren’t going to see very effective monetary policy. At a ‘town hall’ meeting last weekend, while addressing the audit issue, Fed Chairman Bernanke said ‘I don’t think people want Congress making monetary policy.’ But these audit bills don’t call for the Congress to make monetary policy. They call for broader authority for an independent audit of the Fed, from the General Accountability Office. Supporters feel it this authority would allow the Congress to do a better job of overseeing the performance of an entity to which the Congress has delegated the authority to ‘coin money, and regulate the value thereof,’ under Article I of the U.S. Constitution.

How independent is the Fed, right now, to begin with? The Fed is not an apolitical beast. It has had politicians working there in formal leadership positions as well as staffing roles. The Fed’s regulatory performance matters for the conduct of monetary policy, and the Fed’s relationships with the banks it regulates and bails out deserve scrutiny. Recently, we’ve been through a financial calamity, and have endured the biggest spike in the unemployment rate since World War II. Investment returns crumbled in 2007 and 2008, and Federal Reserve monetary and other regulatory policy played a significant role in this calamity. Looking back a little further, how effective has the ‘independent’ Fed been as source of stable prices? Congress passed the law first mandating ‘stable prices’ as a goal for Fed monetary policy in 1977, and the CPI has tripled since then.

The debate over curtailing the current legal restriction on GAO audits for ‘transactions made under the direction of the Federal Open Market Committee’ makes for a good case in point. This provision, on the surface, helps insulate monetary policy from Congressional oversight and/or second-guessing, promoting independent policymaking. But the FOMC conducts monetary policy under authority delegated by the Congress. It seems reasonable to allow for some form of stronger inquiry in this area, especially after the worst financial and economic crisis since the Great Depression. One facet of a possible future investigation could deal with individual monetary policy ‘transactions.’ Under the quantitative easing posture adopted by the Fed in recent years, with a wider range of financial instruments bought to liquify the banking system and promote monetary and credit growth, the question arises – at what price were those instruments bought? Were they ‘market’ prices, or were they another way to apply public resources to overpay for bad assets and help large financial firms that got into trouble?

That may or may not be a valid avenue of inquiry, but it seems like we could benefit greatly from learning about the broader range of issues that could be tackled.

Audit the Fed? Sounds good to me.

View the original article at Washingtons Blog

Related Posts with Thumbnails

Posted in Finance & Economics, Government, Washingtons Blog Articles.


0 Responses

Stay in touch with the conversation, subscribe to the RSS feed for comments on this post.



Some HTML is OK

or, reply to this post via trackback.

Support #altnews & keep Dark Politricks alive

Remember I told you over 5 years ago that they would be trying to shut down sites and YouTube channels that are not promoting the "Official" view. Well it's all happening now big time. Peoples Channels get no money from YouTube any more and Google is being fishy with their AdSense giving money for some clicks but not others. The time is here, it's not "Obama's Internet Cut Off Switch" it's "Trumps Sell Everyones Internet Dirty Laundry Garage Sale". This site must be on some list at GCHQ/NSA as my AdSense revenue which I rely on has gone down by a third. Either people are not helping out by visiting sponsors sanymore or I am being blackballed like many YouTube sites.

It's not just Google/YouTube defunding altenative chanels (mine was shut), but Facebook is also removing content, shutting pages, profiles and groups and removing funds from #altnews that way as well. I was recently kicked off FB and had a page "unpublished" with no reason given. If you don't know already all Facebooks Private Messages and Secret Groups are still analysed and checked for words related to drugs, sex, war etc against their own TOS. Personally I know there are undercover Irish police moving from group to group cloning peoples accounts and getting people booted. Worse than that I know some people in prison now for the content they had on their "secret private group". Use Telegrams secret chat mode to chat on, or if you prefer Wickr. If you really need to, buy a dumb phone with nothing for the NSA/GCHQ to hack into. Ensure it has no GPS tracking on it and that the battery can be removed. These are usually built for old people to get used to technology storing only a set of numbers to call. However they have no games, applications to install or other ways people can exploit the computer tracking device you carry round with you most of the day - your smart phone. If you are paranoid ensure that you can remove the battery when travelling around and do so to prevent GPS tracking or phone mast triangulation. Even with your phone in Flight mode or turned off, it can be turned on remotely and any features like front or back cameras, microphones and keylogging software can be installed to trace you.

So if your not supporting this site already which brings you news from the Left to the Right (really the same war mongering rubbish) then I could REALLY do with some..

Even if it's just £5 or tick the monthly subscription box and throw a few pound my way each month, it will be much appreciated. Read on to find out why.

Why?

Any support to keep this site would be appreciated. You could set up a monthly subscription for £2 like some people do or you could pay a one off donation as a gift.
I am not asking you to pay me for other people's articles, this is a clearing house as well as place to put my own views out into the world. I am asking for help to write more articles like my recent false flag gas attack to get WWIII started in Syria, and Trump away from Putin. Hopefully a few missiles won't mean a WikiLeaks release of that infamous video Trump apparently made in a Russian bedroom with Prostitutes. Also please note that this article was written just an hour after the papers came out, and I always come back and update them.

If you want to read JUST my own articles then use the top menu I have written hundreds of articles for this site and I host numerous amounts of material that has seen me the victim of hacks, DOS plus I have been kicked off multiple hosting companies, free blogging sites, and I have even had threats to cease and desist from the US armed forces. Therefore I have to pay for my own server which is NOT cheap. The more people who read these article on this site the more it costs me so some support would be much appreciated.

I have backups of removed reports shown, then taken down after pressure, that show collusion between nations and the media. I have the full redacted 28/29 pages from the 9.11 commission on the site which seems to have been forgotten about as we help Saudi Arabia bomb Yemeni kids hiding in the rubble with white phosphorus, an illegal weaapon. One that the Israeli's even used when they bombed the UN compound in Gaza during Operation Cast Lead. We complain about Syrian troops (US Controlled ISIS) using chemical weapons to kill "beautiful babies". I suppose all those babies we kill in Iraq, Yemen, Somalia and Syria are just not beautiful enough for Trumps beautiful baby ratio. Plus we kill about 100 times as many as ISIS or the Syrian army have managed by a factor of about 1000 to 1.

I also have a backup of the FOX News series that looked into Israeli connections to 9.11. Obviously FOX removed that as soon as AIPAC, ADL and the rest of the Hasbra brigade protested.

I also have a copy of the the original Liberal Democrats Freedom Bill which was quickly and quietly removed from their site once they enacted and replaced with some watered down rubbish instead once they got into power. No change to police tactics, protesting or our unfair extradition treaty with the USA but we did get a stop to being clamped on private land instead of the mny great ideas in the original.

So ANY support to keep this site running would be much appreciated! I don't have much money after leaving my job and it is a choice between shutting the server or selling the domain or paying a lot of money just so I can show this material.

Material like the FSB Bombings that put Putin in power or the Google no 1 spot when you search for protecting yourself from UK Police with "how to give a no comment interview". If you see any adverts that interest you then please visit them as it helps me without you even needing to give me any money. A few clicks per visit is all it takes to help keep the servers running and tag any tweets with alternative news from the mainstream with the #altnews hashtag I created to keep it alive!

However if you don't want to use the very obvious and cost free ways (to you) to help the site and keep me writing for it then please consider making a small donation. Especially if you have a few quid sitting in your PayPal account doing nothing useful. Why not do a monthly subscription for less money instead. Will you really notice £5 a month?



css.php