Bernanke Letter Argues Against Audit the Fed

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Dear Chairman:

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I am writing to express my deep concern about possible amendments to the Senate financial regulatory reform bill (S. 3217) that would, for the first time, permit the Government Accountability Office (GAO) to audit monetary policy deliberations and operations. Such amendments, if enacted, would seriously threaten monetary policy independence, increase inflation fears and market interest rates, and damage economic stability and job creation.

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The Congress and the American people have a right to know how the Federal Reserve is carrying out its responsibilities and how we are using taxpayers’ resources. I strongly supported greater openness before I came to the Federal Reserve and now, as Chairman, I believe in it even more so.

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In fact, during my tenure, the Federal Reserve has increased its commitment to transparency in a variety of ways, including the creation of a monthly report that provides Congress and the public detailed information on the range of programs and tools that the Federal Reserve has used to respond to the financial crisis as well as our open market activities and lending to depository institutions. Importantly, these monthly reports provide the number and distribution of borrowers under each lending facility established under section 13(3) of the Federal Reserve Act; the value, type, and quality of the collateral that secures advances under each facility; and trends in borrowing under the facilities.

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Moreover, the financial statements of the Federal Reserve, including both the Board of Governors and the Federal Reserve Banks, are already fully audited by an independent accounting firm that ensures that the financial statements completely and accurately report the financial condition of the Federal Reserve System. These audited financial statements are made available to the public, both in print and on our website, and are submitted annually to the Congress.

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There appears to be a widespread misconception about the role the GAO already plays in oversight of the Federal Reserve. The GAO has the authority to audit and review all of the supervisory and regulatory functions of the Federal Reserve. In addition, the GAO is authorized to conduct audits of the credit extended by the Federal Reserve to specific companies under the authority provided by section 13(3) of the Federal Reserve Act, including the loans to American International Group, Bear Steams and the Maiden Lane entities. Indeed, I have personally welcomed and encouraged the GAO to conduct a full and complete audit of the Federal Reserve’s lending facilities for AIG and the Federal Reserve has been cooperating with the GAO in its review of the two Maiden Lane facilities related to AIG.

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We believe that Congress and the American people should have the information to be assured that all of the liquidity programs that the Federal Reserve established under section 13(3) to respond to the financial crisis operate in a financially sound way with taxpayer interests in mind. That is why I have supported additional proposals, like that included in S. 3217, that would allow the GAO to conduct audits of the operational integrity, internal controls, and financial reporting of the broad-based liquidity facilities that were established under section 13(3) to support the functioning of key financial markets during the crisis. With adoption of this proposal, which we support, all of the Federal Reserve’s actions to use the authority under section 13(3) to respond to the current or any future financial crisis will be subject to audit by the GAO.

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However, thirty years ago, Congress purposefully — and for good reason — excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and 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.

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Some in Congress have offered proposals that would remove these statutory protections and, thus, subject monetary policy decisions to regular review by the GAO.

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Financial markets, in particular, likely would see a grant of review authority to the GAO in these areas as a serious weakening of monetary policy independence. GAO-audits are very different from the type of financial audit typically conducted by an independent accounting firm. Through its investigations and audits, the GAO typically makes its own judgments about policy actions and the manner in which they are implemented and makes recommendations to the audited agency and to the Congress for policy changes or future policy actions. Thus, reviews or the threat of reviews by the GAO of monetary policy are likely to be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence likely would raise fears about future inflation, leading to higher long-term interest rates, a diminished status of the dollar in global financial markets, and reduced economic and financial stability.

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The financial crisis has brought to Congress’s attention the need to address a number of regulatory deficiencies and weaknesses to prepare against any future crisis. We commend these efforts. In taking these actions, however, we should not change what has worked well and to the benefit of taxpayers and the American economy. Monetary policy independence from the political process has served our nation well, and I would ask that you keep that foremost in mind as these issues are discussed in the current Senate debate.

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Thank you for your consideration.

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Sincerely,