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Wednesday, July 22, 2009

The Fed's Red Herring

During Congressional hearings yesterday, the Federal Reserve Chairman, Ben Bernanke, was again questioned vigorously by Congressman Ron Paul regarding more transparency at the Fed. Congressman Paul has introduced H.R. 1207 which would demand more transparency from the Federal Reserve. Currently, and shockingly, the assets, liabilities, and other investments of the Federal Reserve are not open to public scrutiny nor to the scrutiny of just about anyone. No one outside the circle of the Federal Reserve has any idea just how much, and what make up, the current investment portfolio of the Federal Reserve is and how it's doing. Here's how Bernanke justified the limited scrutiny of the Federal Reserve.

We have recently taken additional steps to better inform the public about the programs we have instituted to combat the financial crisis. We expanded our website this year to bring together already available information as well as considerable new information on our policy programs and financial activities.2 In June, we initiated a monthly report to the Congress (also posted on our website) that provides even more information on Federal Reserve liquidity programs, including breakdowns of our lending, the associated collateral, and other facets of programs established to address the financial crisis.3 These steps should help the public understand the efforts that we have taken to protect the taxpayer as we supply liquidity to the financial system and support the functioning of key credit markets.

The Congress has recently discussed proposals to expand the audit authority of the Government Accountability Office (GAO) over the Federal Reserve. As you know, the Federal Reserve is already subject to frequent reviews by the GAO. The GAO has broad authority to audit our operations and functions. The Congress recently granted the GAO new authority to conduct audits of the credit facilities extended by the Federal Reserve to "single and specific" companies under the authority provided by section 13(3) of the Federal Reserve Act, including the loan facilities provided to, or created for, American International Group and Bear Stearns. The GAO and the Special Inspector General have the right to audit our TALF program, which uses funds from the Troubled Assets Relief Program.

The Congress, however, purposefully--and for good reason--excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, including open market and discount window operations. In doing so, the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy. Financial markets, in particular, likely would see a grant of review authority in these areas to the GAO as a serious weakening of monetary policy independence. Because GAO reviews may be initiated at the request of members of Congress, reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability. We will continue to work with the Congress to provide the information it needs to oversee our activities effectively, yet in a way that does not compromise monetary policy independence.

In other words, there's already plenty of transparency and any more would make the Federal Reserve politicized. The Chariman worries that if the Congress knew too much, they would try and influence monetary policy. Keep in mind that the portfolio of the Federal Reserve is likely in the several trillions. Yet, the same Federal Reserve would like absolutely no sunshine on exactlyt the make up of this portfolio because they worry that too much sunshine might politicize their decision making process.

This is a total red herring. The Federal Reserve chairman and all the Governors are selected and their terms are four years. The testimony the Chairman just gave is a regular occurrence. Of course, it's very difficult to question an individual when you really don't know exactly what he's doing. There's already some political pressure on the Fed. Yet, they are a totally independent financial institution. The decisions of the Chairman and the board are final. Short of corruption, removing any of them prior to the end of their terms is nearly impossible.

Sunshine influencing monetary policy is much more perception than reality. Sure, Congress can pontificate and bloviate. They can do that now. Frankly, most of them wouldn't have the first clue what any of the numbers mean anyway. The decisions of the Fed and its board are final and independent. Yet, transparency is critical. The Federal Reserve holds onto trillions of dollar investments. The bank literally controls and manipulates the money supply. Yet, the people of this country have absolutely no idea what's going on. We don't know how much is in the portfolio. We don't know how it's made up. Near daily, the Federal Reserve manipulates the money supply by buying and selling securities. Yet, the public doesn't know. That's neither open or transparent. In fact, the Federal Reserve operates as monetarial MONARCH. Transparency would be the first step toward reducing its power, and that's what this anti transparency stance is really all about.

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