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.
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.