Federal Reserve Chairman Ben Bernanke faced a grilling in Congress on Tuesday about the role of the Fed, and spoke out strongly against a legislative proposal to audit the central bank.
Speaking to the House Financial Services Committee, Bernanke tempered optimism that the economy is improving, noting that, "despite these positive signs, the rate of job loss remains high and the unemployment rate has continued its steep rise." He added the Fed expects inflation to remain subdued over the next two years.
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He discussed the Federal Reserve's strategy to extricate itself from the outsized role it's taken in the economy to avert financial disaster. He reminded Congress about the need to get the budget deficit fixed: If not, "we risk having neither financial stability nor durable economic growth," he said.
Bernanke also came out in strong opposition to legislation proposed by Rep. Ron Paul, R-Texas, to audit the Federal Reserve.
Since its introduction in February, the bill has attracted 275 co-sponsors, enough to gain passage in the House of Representatives. In the Senate, the prospects are unclear. Fourteen Republicans, three Democrats and one Independent, Vermont Sen. Bernie Sanders, who votes with Democrats, have signed on to the bill. The legislation simply calls for a Government Accountability Office audit of the Federal Reserve.
Why is something that sounds so simple so contentious?
Bernanke sees the legislation as threatening. "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," Bernanke said.
The actual facts of the debate have become quite confused. It's not as if the Fed functions without any auditing. The Fed is, in fact, so audited that it issued a 52-page report just to recount the audits it underwent in 2008.
The law currently disallows auditing of three areas: the swap lines the Federal Reserve arranges with other central banks and international financing organizations; the actual deliberations and decisions of monetary policy (such as how much to raise and lower interest rates); and transactions made under the Federal Open Market Committee's direction.
However, Bernanke noted that the Fed releases the minutes of its meetings within three weeks (available on its Web site) and after five years, the verbatim transcripts of its meetings. Every week, the Fed publishes its balance sheet. Many of its loan programs are spelled out in detail (prepare to have your mind numbed here).
Bernanke further noted that the GAO has already been given expanded authority to audit the Federal Reserve's actions providing bailout loans to Bear Stearns and AIG ( AIG - news - people ). The Federal Reserve is responsible for administering part of the $700 billion TARP bailout, the loan program known as TALF, and this, too, is subject to GAO and inspector-general auditing.
The Federal Reserve is not nearly as prone to secrecy as its detractors would like people to believe.
Likely at the forefront of Bernanke's mind is that Rep. Paul, the sponsor of the Federal Reserve Sunshine Act, would rather see the Fed abolished than audited. In 2002, Paul introduced legislation "to restore financial stability to America's economy by abolishing the Federal Reserve," because "every economic downturn suffered by the country over the last 80 years can be traced to Federal Reserve policy." (This is a long debate, but it should be noted that data from the National Bureau of Economic Statistics shows that from 1854 to the creation of the Federal Reserve, the country spent 47% of the time in recession; since the Federal Reserve was created, the U.S. has been in recession only 21% of the time. Whatever role the Fed plays in creating recessions, it's not as if the absence of the central bank would automatically mean some kinds of end to all recessions.)
Bernanke said that if the bill passed, "financial markets, in particular, likely would see a grant of review authority in those areas to the GAO as a serious weakening of monetary policy independence." Perhaps it's not the review authority itself, but a legislative victory for one of the Fed's fiercest opponents that markets would be watching.
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