Audit the Fed Up Today

Yesterday, the Senate passed by overwhelming margins two amendments to Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill: One sponsored by Sen. Barbara Boxer (D-Calif.), to ensure no further taxpayer dollars go to Wall Street bailouts, and one agreed to by Dodd and Sen. Richard Shelby (R-Ala.) to drop the $50 billion resolution authority fund from the bill.

Now, on to the controversial amendments.

Up today: Sen. Bernie Sanders’ (I-Vt.) amendment to authorize the Government Accountability Office to perform a more thorough audit of the Federal Reserve’s books — that is, Audit the Fed. But would auditing the Fed really do? And why is the Fed and the administration so afraid of it? Mike Konczal, the blogger also known as Rortybomb and a fellow at the Roosevelt Institute, speaks with The Center for Economic and Policy Research’s Dean Baker to find out. The whole post is worth a read, but here is a snippet:

The Fed has been giving two arguments against having the government audit their books to see who got what money under what terms, what the collateral was, etc. and making that information available.

Now with the audit — it’s up to Congress to decide whether to release the information to the public, so having the government audit it doesn’t mean it automatically becomes publicly available. It would be made available to the appropriate committees who would then make that decision. I personally would say it should be made public, but in any case the point would be to get a full accounting here so we can know what happened with the money.

The first argument the Fed is giving is that this would create a stigma for the banks. I’m kind of at a loss to understand what they even mean. They can give an argument that if you have a banking crisis and Bear [Stearns] is about to meltdown, and they suddenly need money from the Fed, and there’s this public statement saying that Bear went running to the Fed and borrowed $5 billion, that puts Bear in big trouble and a bank run could start.

But we’re talking about a year and a half, two years later [when the auditors might release that information]. So I don’t understand how that creates a crisis. Does that create a stigma, that the banks were in trouble? Well maybe, but I’m not sure why we should care. The Fed is not in the business of covering up banks’ bad financial shape. The principle we want is transparency. If they know a bank’s in trouble, again we don’t want to create a run, but after the fact the Fed should be making the banks’ condition more transparent, not helping them conceal it, as they did with Lehman for many months,.

So this stigma story I don’t quite understand. The other argument is this would hurt their independence. But again, I just don’t see any legitimate meaning of that term, independence, that it interferes with. We want them to make what they think are the best calls. But after the fact, do they have to answer for it? Should they have to say that these are the calls we made, this is why we made them? Absolutely.

I don’t understand how that isn’t independent. So those are the two arguments, on the one hand the stigma that will be created if at some point it’s known that banks go to the Fed, and on the other hand, that it somehow harms their independence. I mean, the FDA has to give a full account, we reviewed this drug, we reviewed that drug, this is why we approved this drug, here’s why we didn’t. I don’t understand why the Fed should operate differently.