The Independence of the Fed at Risk: Watt versus Paul-Grayson (Remember Iceland -- An Independent Central Bank)
Representative Mel Watt (D-NC) is out to protect the independence of the Fed from the risk of an intrusive audit from the Government Accountability Office (GAO). The risk comes in the form of a bill initiated by Ron Paul and Alan Grayson that calls for an audit of the Fed. The bill, which now has more than 300 co-sponsors, would allow Congress to find out who the Fed lent more than $2 trillion to through its special lending facilities, and under what terms. Congress would also be able to find out which countries were allowed to take advantage of dollar swaps at the peak of the financial crisis last fall.
Allowing our elected representatives to know what our central bank (the Fed) is doing with our money might seem reasonable, but not to Mr. Watt. He has proposed an alternative which would keep this information secret. According to Mr. Watt, the prospect of a full GAO audit poses a huge risk to the Fed's independent conduct of monetary policy.
It is not clear how a GAO audit precludes Fed independence, but we should know exactly what we could be putting at risk. As a result of the Fed's independent conduct of monetary policy, Federal Reserve Board Chairman Ben Bernanke ran to Congress last September and said that if Congress did not immediately approve $700 billion in TARP money, then the economy would collapse. We may not have been in this situation without the Fed's independent monetary policy.
The Fed also funneled tens of billions in handouts of taxpayer dollars through AIG to Goldman Sachs and other major banks. This may also not have been possible had it not been for the Fed's independent monetary policy. In fact, Wall Street's current high profits and high bonuses may not have been possible without the Fed's independent monetary policy.
The Fed deserves responsibility for the other side of the equation as well. We would not be sitting here in the wreckage of an $8 trillion housing bubble, with 10.2 percent unemployment and 2 million foreclosures a year, without the Fed's independent monetary policy. We would not have seen the projections of debt soar by $6 trillion at the end of the next decade without the Fed's independent monetary policy.
Representative Watt is exactly right, we should think very carefully before we let Congress do anything that interferes with the Fed's independent monetary policy. Who knows where that could lead us?
I agree with most of your points and recognize the sarcasm in the last paragraph.
It's quite possible, nay, probable that the fed has been stepping up purchases of Treasury bonds to an extent far greater than currently imagined. Revelation of this fact would send the US dollar into free fall.
It's not so much the Fed's independence that's should be questioned but Greenspan and Bernanke's slavish adherence to free market theories of a'self-policing, self-correcting' market. Also, if the Fed is going to be independent from political meddling from the Executive or Legislative branches, we better make DAMN sure it's also independent from the BANKS too. Hear that Geithner?
November 18, 2009 11:18 AM | Reply | Permalink
"It is not clear how a GAO audit precludes Fed independence, but we should know exactly what we could be putting at risk."
Without endorsing recent Fed actions or its policy orientation, I think concerns about Congress being more involved in its oversight are justified. I mean, are you really trying to argue that our recent Congresses have been fiscally responsible?
I'm old enough to remember a Republican Congress spending $50MM in order to investigate a twenty-year-old land deal in which a sitting president lost $70,000, and ended up impeaching him for a consensual blowjob. I'd want to make sure that the Fed wasn't more concerned with defending itself against frivolous, politically-motivated attacks from Congress than conducting its business. Democrats won't be in power forever.
November 18, 2009 11:33 AM | Reply | Permalink
We the people do have a right to know what our government is doing with our money.
The Fed indeed may be responsible for bad decisions, even criminal favoritism.
But the risks of full disclosure are very, very real as well. In an uncertain world full of insecure, irrational people, a little knowledge is a very, very dangerous thing. About 15 years ago geologists concluded that a volcanic eruption was likely to occur in Mammoth Lakes, Ca. in the near future. Property values promptly dropped by 50% or more and stayed there for years. Are you prepared to take responsibility for a similar depression of the nation's, or the world's, economy? I doubt it.
Which brings me to your consistent claims of prescience and wisdom. It's time for you to speak out. Did you predict the current stock market boom? Do you agree with Roubini that it's a huge, carry-trade bubble? Do you think we should pressure China on currency manipulation? Speak, oh wise one.
November 18, 2009 11:39 AM | Reply | Permalink
So you trust an unelected super-Constitutional body more than our elected officials to do right by us? Since when has the Fed ever done so? Its "independent monetary policy" has always skewed to banks and big-money traders. In its 96-year history it has made exactly the wrong decisions at precisely the wrong times, resulting in the 1929 Depression and the meltdown last year, when a decade of interest-rigged "cheap money" finally caught up with us. Paul has said he would like to get rid of the Fed. It's hard to defend this insider "Goldman Sachs Club". Make it all public. It's our damn money.
November 18, 2009 1:29 PM | Reply | Permalink
I assume your comment was directed at me.
I don't know how you conclude that I trust the Fed more than our elected officials. I don't agree with any of your reasoning. Before the Fed was established our management of our economy was very imperfect. The Fed was established to try to improve it. For a long time it looked as if it had done so. But then Congress - not the Fed - repealed Glass-Steagle, legalized dreadful financial instruments, and refused to properly fund and empower regulatory agencies. Or really listen to complaints and warnings.
So here we are. What to do? I don't know. Try new things...but be aware of the huge risks of failure. It's easy to jump from the frying pan into the fire.
November 18, 2009 2:19 PM | Reply | Permalink
"spider",
I believe that the Federal Reserve has a very poor record for many reasons. Note that we did not experience any recessions approaching the scale of The Great Depression until after the Federal Reserve was created.
The boom-bust cycles we experience are created in large part by the Federal Reserve's manipulation of interest rates, market interventions, et cetera. Interventions by our Federal Government play a significant role as well, and you are of course correct to mention the role Congress can (and often does) play.
With regards to the recent housing bubble, I will add that the Office of the Comptroller for the Currency and Office of Thrift Supervision both interceded on the behalves of financial institutions when all 50 States' Attorneys attempted to protect their states' citizens from predatory lending. What we experienced in the first half of this decade is both the Federal Reserve setting the stage for the boom and crash, and Federal agencies protecting the banks/lenders from regulation.
The Federal Reserve and the Federal government have been and are protecting select banks/financial institutions at our expense. Despite rhetorical "fear-tactics" to the contrary, "The Federal Reserve Transparency Act of 2009" (HR 1207) does not compromise the independence of the Federal Reserve; but it may likely expose some of its self-serving activities.
You wrote that "our management of our economy was very imperfect" before the creation of the Federal Reserve, and here you and I agree, albeit for different reasons. Central planning/central banking cannot control the financial activity of millions of citizens, small businesses, numerous corporations, institutions, et cetera. The Federal Reserve is incapable of managing anything so complex; the sooner a majority of our fellow citizens realize this the sooner we may have a serious discussion concerning the "necessity" or desirability of a central bank.
With regards to Representative Watt's "Audit" legislation, I and many others read it for what it is - another intercession by the Federal government to protect a financial institution at the expense of the United Sates' citizens.
Best regards,
Charles
November 18, 2009 3:20 PM | Reply | Permalink
Note that we did not experience any recessions approaching the scale of The Great Depression until after the Federal Reserve was created.
I don't believe that's correct. The Depression of 1907 was terrible, and would have been much worse, had not J.P. Morgan interceded. The Fed was created to allow the Federal government to do what he did, in a systematic and regular way.
I'm not opposed to dumping the Fed...or keeping it. Just as I'm not opposed to an audit...or for it. I simply don't know enough to know what's best or how to proceed.
But I am aware of the risks.
November 18, 2009 5:19 PM | Reply | Permalink
Actually, my comments were directed at Dean Baker, but since you chimed in, the Fed itself began chipping away at Glass-Steagall back in the '80s, first by allowing banks to have a percentage of their gross revenue from investement banking. And Alan Greenspan and Ben Bernanke ARE free-market dogmatists. Enough of this sticky, insider scam. Dump the Fed, as I'm sure is the postion of evil ol' Ron Paul, cited by Baker above.
November 18, 2009 4:13 PM | Reply | Permalink
This should be a response to Spider, but, once again, I was NAILED by TPM's fast, fast, FAST sign-off.
November 18, 2009 4:15 PM | Reply | Permalink
Ron Paul and Alan Grayson make interesting bedfellows, don't they? But that combination is proof that the skepticism and suspicion of the Federal Reserve and its powers transcends the highly polarized political climate we live in.
It is within the purview of Congress to carry out such an inquiry, and more power to Paul and Grayson. The Fed really ought to be put on a short leash --Alan Greenspan, the very popular Fed Chairman for too many years, was a man of unparalleled incompetence; and the nation has been living in this "free market" libertarian claptrap for much too long.
By some accounts, the Fed, under Greenspan, is responsible for the Savings and Loan debacle in the late eighties, the dot.com bubble of the late nineties, and the credit bubble of the past decade.
Rather than increasing the powers of the Fed, they should be retracted. The Fed should be responsible only for monetary stability. The responsibility for maintaining employment should be the role of Congress. The Fed should also be stripped of all regulatory powers. It had these powers and declined to use them. Something along the lines of Dodd's proposal should be enacted.
The sooner the better.
November 18, 2009 8:05 PM | Reply | Permalink