Does the Federal Reserve need an audit?

Concern about the Fed's transparency ebbs and flows. Today, over 300 members of Congress think the time has come to audit the Federal Reserve.

David R. Francis

Is the Federal Reserve too secretive? This issue has waxed and waned. It’s reappearing again in Congress because the Fed failed to prevent the financial crisis and the “great recession,” prompting calls for major change at the world’s most powerful central bank.

The change with the most backing is a proposal by Rep. Ron Paul (R) of Texas to allow the Government Accountability Office (GAO) to audit ­– examine and investigate – the Fed’s monetary policy decisions.

Fed officials adamantly oppose it.

"My fear is that if we take what could be an unpopular step, Congress will order an audit, which would be a way of applying pressure, or perceived as a way of applying pressure, to our policy decisions,” Fed Chairman Ben Bernanke said in congressional testimony Dec. 3.

“Incredibly dangerous,” stated former Fed governor and Columbia University professor Frederic Mishkin. The fear is that a less independent central bank, heavily influenced by politicians, will permit greater inflation.

But Mr. Paul’s amendment attracted bipartisan support with more than 300 cosponsors. It became part of a broad financial-reform bill that passed the House Financial Services Committee earlier this month. The GAO can already audit the Fed’s regulatory and supervisory activities. The amendment would repeal a 1978 law that forbade the agency from looking into the Fed’s relations with foreign central banks and the monetary deliberations of its Federal Open Market Committee (FOMC), which sets short-term interest rates. But release of GAO findings would be delayed 180 days to ease fears of political meddling with interest rate policy.

Congress has constitutional authority over the Fed with its vital money-creating power. At present, the Fed’s books are audited by Deloitte and Touche, a private firm.
As a libertarian, Paul seems presently more interested in ending Fed secrecy than putting Congress in charge of monetary policy. His recent book, “End the Fed,” suggests closing the central bank, presumably letting financial markets, certainly not central bankers or politicians, set interest rates. “Politics are already part of monetary policy,” argues Paul’s press secretary, Rachel Mills. The amendment merely aims at providing greater Fed “transparency and accountability,” she says.

The Fed is far less secretive than it was in the late 1970s, when a Monitor column, urging faster release of FOMC decisions, prompted a rebuke by then-Fed Chairman Arthur Burns. “David,” said Dr. Burns, “that column wasn’t worthy of you.”

The central bank has long resisted greater scrutiny by Congress, according to a new book, “Deception and Abuse at the Fed.” Author Robert Auerbach, a former economist and investigator with the House Committee on Financial Services, details the incredible and sometimes dishonorable efforts Fed officials have made to keep their operations secret and independent. In an interview, he listed some shady actions: no-bid contracts, falsely telling Congress for 17 years it had no transcripts of its monetary policymaking body when it actually did, improper payments to academics totaling as much as $80,000 a month, leaked policy decisions to journalists and others that could be exploited in financial markets, and shredding of official records.

Mr. Auerbach talks of Fed examiners and officers in New York taking gifts, and sometimes jobs, from banks they regulate. “Examination was a joke,” says the economist, now at the University of Texas at Austin. More “checks and balances” are needed.