May 26, 2009
To my knowledge, no one has proposed waterboarding the Fed. However, the response of much of the country's political leadership to the suggestion that the Government Accountability Office (GAO) audit the Federal Reserve Board might lead people to think that waterboarding is on the agenda.
The basic story is straightforward. Congress has lent more than $700 billion to bankers at below market interest rates through the TARP. This was to keep the banks from going belly up. At the same time, the Fed has lent more than $2 trillion to banks and non-financial institutions to maintain liquidity.
The Congressional Oversight Panel, led by Elizabeth Warren, has frequently complained that the Treasury has not always been altogether forthcoming in providing information about its lending practices. However, there is at least a public paper trail. We can find out how much money each bank received and under what terms.
By contrast, there is no public paper trail for the Fed's loans, even though it has more than three times as much money outstanding as does the Treasury through TARP. The Fed has only provided aggregate information on the amount of loans in each of its various lending programs, and general information on the terms of the loans and the types of collateral received.
However, it is not possible to find out how much money Goldman Sachs borrowed, at what interest rate, and which assets it posted as collateral. The Fed has explicitly refused to make information about specific borrowers public. In fact, the inspector general who has the responsibility for overseeing the Fed told Congress that she does not have this information. Apparently the Fed doesn't even trust its inspector general with information on its lending practices.
It is difficult to understand the rationale for this secrecy. There may be times where it is necessary for the Fed to lend money to a bank without immediately making the information public in order to avoid a panic, however it is difficult to understand why this information cannot be made available weeks or even months later. After all, this money does not belong to the Fed; it belongs to us.
The proposal for a GAO audit of the Fed is a first step towards reasserting democratic control over this institution. In many respects, the Fed has more direct control over the direction of the economy than the President and Congress, yet it carries through its actions largely outside of the public's view.
Furthermore, it is structured so that the banks have a hugely disproportionate influence over the Fed's actions. The Fed's 12 district bank presidents are appointed through a process dominated by the banks within each district. These 12 presidents sit on the Open Market Committee (OMC), the Fed's key decision-making body on monetary policy, far outnumbering the seven governors who are appointed through the democratic process. (Only 5 of the 12 bank presidents are voting members of the OMC. The president of the New York Fed is always a voting member. The other 4 voting positions rotate among the other 11 districts.)
In a democracy, it is difficult to justify a situation in which the most important economic policymaking body is, by design, more answerable to the banking industry than democratically elected officials. The Federal Reserve Transparency Act is a step toward making the Fed accountable. It would simply require that the Government Accountability Office (GAO) audit the Fed's books and report to Congress on the bailout and other issues.
While more than 130 Republican members of the House have signed on as co-sponsors of the bill, just over 30 Democrats are co-sponsors. No one in the leadership has signed onto the bill. It is difficult to reconcile the Democrats' position with President Obama's often-repeated commitment to transparency. The resistance to transparency at the Fed will only encourage the public to believe that there actually is something to hide.
The Fed bears primary responsibility for the economic collapse. Alan Greenspan failed to take any steps to rein in the housing bubble and arguably even promoted it. It was inevitable that the collapse of an $8 trillion bubble would lead to a serious downturn of the sort that we are now seeing.
This incredible failure of the Fed should raise fundamental questions about its structure. Certainly it would be a positive step if the Fed were more answerable to democratically-elected officials and less accountable toward Wall Street bankers. A GAO audit would be a big step in the right direction.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.