Archive for March, 2010

Should Congress Audit the Federal Reserve?

Wednesday, March 17th, 2010

Alan Greenspan, former chairman of the Federal Reserve, was called before Congress to explain exactly what went wrong.  Greenspan, who had all the right answers during his reign as chairman, told Congress that it had been a mistake to trust banks to operate in the best interests of their shareholders.

When the housing bubble popped and our nation’s financial markets began to freeze and fail, members of Congress and the rest of the country started looking for answers.

The Federal Reserve Transparency Act of 2009 calls for an official audit of the Fed.  Congress wants answers regarding Fed actions taken during the recent recession.  The Federal Reserve opposes an audit, citing the central bank’s need for independence from political influence.  Citizens demand financial institutions that received federal bailout money to be held accountable for the poor decisions that indirectly led to the nation’s current economic struggles.

Citibank is one of the financial institutions that received federal bailout money during our current economic recession.

Last February Representative Ron Paul (R-TX) introduced his Audit the Fed legislation.  Congressman Paul, author of End the Fed, has been a long time opponent of the Federal Reserve.  In 2007, He also introduced legislation with aims to abolish the Fed.  In the past the Congressman hadn’t received much support for his Federal Reserve policies, but economic trouble has boosted this particular bill’s popularity

The bill has received bipartisan support from several House members, including co-sponsor Congressman Peter DeFazio (D-OR).  Karmen Fore, district director for Congressman DeFazio, says that Congressman DeFazio absolutely believes in a need for greater transparency on Fed actions.  She says that entities like the Fed that benefit from public resources should be subject to public scrutiny.

Fore notes that the Federal Reserve wields enormous power by ultimately setting interest rates. The Fed makes decisions that impact every American. Fore says that Congressman DeFazio believes the power of secrecy the Fed wields is unnecessary and unacceptable.

Fed Chairman Ben Bernanke opposes Congressional audits of the Federal Reserve.    Bernanke believes the current information released is adequate. The chairman also wants to get in front of any potential government audit by making information about the AIG bailouts available. He feels an audit could give the impression that Congress is trying to influence monetary policy.

When asked about the importance of central banking independence from political influence, Judith Johansen, member of the Portland Branch of the Federal Reserve, says, ““I think if you interject politics into that, it creates this external perturbation into the equation that would just be very unpredictable and just create a lot of uncertainty into the markets.”

She believes a central banking system must make decisions that affect the backbone of a national economy.  Johansen believes that central banking decisions should be made in “an atmosphere of integrity.”  She cites the importance of checks and balances within our own political system, noting that no one would want a Senator to call in a favor from a Supreme Court Justice because of previous support on an issue.

One of the significant driving forces behind Audit the Fed legislation is public displeasure in regards to federal money loaned to financial institutions during the economic recession.  A survey conducted by CBS News in March of 2009 showed 53% of Americans disapprove of the government giving federal bailout money to banks as a means to fix the economy.

Duane Taylor, who politically considers himself a Ron Paul Republican, believes it was wrong for the government to bail out companies and private businesses that had poor business plans.

Duane says that the Fed has taken our wealth and spread it to corporations that cannot manage their businesses.” When asked about the businesses being deemed ‘too big to fail’, Duane believes that the phrase is just a sound bite made up by Congress to justify what they’ve been doing.

When asked whether or not the Fed should be subject to a Congressional audit, Dr. Tim Duy, an economics professor at the University of Oregon who follows Fed activity on his blog FedWatch, concedes that it depends on how the word ‘audit’ is defined.

Duy says, “I think that auditing in the sense that interfering with monetary policy would be a poor decision because it would likely lead to disruptive policy.  I’m less concerned with auditing, especially with lag, the emergency lending facilities.”

The bill made it through review by the House Financial Services Committee and had adequate support to pass in the House of Representatives.  Now the bill is headed to the Senate for a vote.  If the legislation manages to become law, the nation should be extremely interested in how Congress will define its auditing power.

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Profile of Judith Johansen

Tuesday, March 9th, 2010

Judith Johansen has worked in many varied fields.  She was the CEO of Pacific Power Corporation and is currently the President of Marylhurst University, just outside of Portland Oregon.

She also has experience in central banking.  Johansen is a member of the Portland Branch of the Federal Reserve District 12.  She believes independence can be crucial in relation to central banking.

The Federal Reserve covets independence.  The Fed has used its independence in times of crisis, like the market crisis after 9/11.  The Fed also wants independence from political influence to ensure a stable economy.  Fed chairman, Ben Bernanke, opposes the Federal Reserve Transparency Act of 2009 because he believes it will lead to political influence in monetary policy.

When asked about the importance of independence in a central banking system, Judith Johansen cites the events that took place after the attacks on September 11th.

Johansen tells of the Fed taking swift action by pumping money into the financial system to assure banks could stay open and cash would flow in the financial markets.  If the Fed had been subject to normal political bureaucracy and held a broader charge other than the stability of the economy, they would not have been able to act so quickly.  The results would have been disastrous.

When asked about the importance of separating politics and central banking, Johansen says, “I think if you interject politics into that, it creates this external perturbation into the equation that would just be very unpredictable and just create a lot of uncertainty into the markets.”

She also talks about the need for a central bank to make decisions that affect the backbone of our national economy, which means that decisions must also be made in “an atmosphere of integrity.”

Checks and balances exist within our own government in order to maintain a balance of power and responsibility.  President Johansen mentions that you wouldn’t want a Senator to call on a Supreme Court Justice for a favor because the Senator showed support on an old issue.

Johansen works for the Fed in an advisory role.  Each board member reports on a specific area of expertise. Johansen reports on education because she is the president of Marylhurst University, and on transportation because she is President of the Port of Portland.

As Johansen continues to advise the Fed, the Federal Reserve Transparency act of 2009 heads to the Senate for a vote.  Congress and the public want answers to Fed actions and financial bailouts, but an audit could compromise financial policy.  The issue of independence and how the bill will affect the Federal Reserve’s desire to be separate from other national institutions will be decided long after the bill passes or fails.

Profile of Dr. Tim Duy

Tuesday, March 9th, 2010

The Federal Reserve has made damaging economic mistakes in the past.  The Fed’s important role in our economy magnifies these mistakes and impacts our nation’s social welfare.

The Fed took unprecedented actions during the country’s latest severe economic downturn by bailing out large financial companies like AIG and infusing large sums of capital into the struggling economy. Now some members of Congress want to look deeper into these actions and see how they have, and will, affect our economy.  Some members of Congress want to monitor the Fed with more scrutiny.  Congress is calling for an audit.

The bursting of the housing bubble is viewed as an important driving force that lead to our nation’s current economic condition.  Dr. Duy, an Economics professor at the University of Oregon, feels that the Fed failed to take seriously their regulatory responsibility in the realm of consumer mortgages.

To aid in the recovery process, the Federal Reserve purchased toxic mortgage-backed securities from struggling financial institutions. Buying these toxic mortgage-backed assets bailed out troubled financial institutions, eased the banking industry’s lending problem, and ensured that additional negative spillovers wouldn’t drastically impact the economy.

Dr. Tim Duy monitors the Fed and regularly comments on Fed activities on Tim Duy’s Fed Watch blog.  When asked about whether or not Congress should initiate an audit, Dr. Duy points to the two different aspects of a Congressional audit.  If a Congressional audit leads to questioning the rationale and direction of monetary policy, he believes it would likely lead to greater political pressure on the Fed.

“I think that auditing in the sense that interfering with monetary policy would be a poor decision because it would likely lead to disruptive policy.  I’m less concerned with auditing, especially with lag, the emergency lending facilities.”

Political influence directed at the Fed can lead to higher inflation rates.  Higher inflation rates negatively impact economic activity by inflating prices of consumer goods ranging from low priced products like food and clothing to high priced products like cars and houses.

If audit information is dispersed in a timely non-detrimental manner, Dr. Duy feels the Fed should be open about what actions took place and why those actions were deemed necessary.

“I think that trying to hide behind the veil of secrecy only leads to suspicion upon suspicion, that the cozy relationship between Wall Street and Washington is a detriment to the U.S. public as a whole.”

Dr. Duy believes the Fed should have gotten in front of this type of criticism a long time ago.