VIEWPOINT: You’d Think the Fed Was the Bastille

The amount of vituperative speech and ambient hate in public “debate” has led me to strictly ration my daily dose of “the news.” So I might be the last person in America to have noticed that the left and right fringes have finally found a cause that unites them. It’s “Audit the Fed.” Right and left alike can now raise their fists and call Ben Bernanke “a criminal.” The flag is carried by career Fed-disser, Congressman Ron Paul, whose bill H.R. 1207, The Federal Reserve Transparency Act, currently has 292 co-sponsors and is backed by a viral internet campaign domiciled on Paul’s campaign for liberty, but trans-linked throughout the net. I stumbled on the call to sign the petition and to ask my Congresspeople to support it at, an otherwise left-leaning news and blog aggregator. Alternet has it posted as one of their top 10 campaigns, under the blurb, “The Federal Reserve is responsible for the distribution of trillions in taxpayer money. But where did it go?” I was astounded to find “audit the Fed” promoted alongside campaigns to “stop politicians from hooliganizing health reform,” “protect President Obama,” and “bring Chevron to account.” And it’s not just Alternet in bed with the opposition. On the Huffington Post, I found a link to Wall Street Journal interview with Ron Paul, “Audit the Fed, Then End It.” The link came to Huffington Post via disinfo, a site that bills itself as progressive, yet not closed to conservative ideas. At the yet more liberal The Nation, William Greider, proclaiming last July against giving the Fed more power in the Administration’s plan for reordering financial regulation, quotes himself telling an old friend and now retired Fed staffer, “We think that it would be a good time to dismantle the temple. Democratize the Fed. Or tear it down. Create something new in its place that’s accountable to the public.” By accountable to the public he means to Congress. Ignoring that there is a lively debate going on whether Congress is as accountable to voters as it is to special interests that finance its campaigns. Ignoring that, if you listen to floor debate or the questions elected representatives ask in hearings, you’ll realize too few of them actually know the difference between reserve requirements and capital requirements, or how bank reserves are related to the supply of money and credit. In other words, are they equipped to closely monitor the Fed? To second guess the deliberations of the FOMC? To opine whether a coupon pass or system RPs would be more effective at a specific point in time? But what shocks me more than this weird alliance is that the campaign against the Fed is promoted with blatant falsehoods, untruths that neither its liberal nor conservative supporters have bothered to question. First of all, the Federal Reserve is NOT responsible for the distribution of trillions in taxpayer money. The Fed does not fund its security purchases, loans, and liquidity facilities with tax dollars. The Fed funds assets with reserve deposits of member banks. (The mechanism roughly speaking is that a loan or the purchase of a security, for instance, is offset by a credit to the reserve account of a bank.) The profit earned on the Fed’s assets is considerable, and most of its revenue – after paying expenses – is turned over to the U.S. Treasury. From 1914 to the present, about 95 percent of the Reserve Banks’ net earnings have been paid into the Treasury. During 2007, the Federal Reserve paid approximately $34.437 billion of their $41.941 billion total income to the U.S. Treasury. Second, except for a list of the actual transactions, the dates, amounts and counterparties’ names, the Fed is quite forthcoming about its activities. On a weekly basis the Fed reports “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks (Statistical Release H.4.1, easily found on In addition, there are System Monthly Reports on Credit and Liquidity Programs, and a variety of reports pursuant to Section 129 of the Emergency Economic Stabilization Act of 2008: regular updates, updates specific to AIG, Bank of America, Bear Stearns, Citigroup and the various emergency funding facilities. Then there’s a massive annual report. This includes an independent audit – by a Big Four audit firm – of the system. The Federal Reserve also has posted readable explanations of its programs and the data they produce on its website. It’s not sexy stuff, but it represents a sincere attempt to dispel the mystery and misunderstanding about Fed operations. One wonders how many members of the Congress or the public has attempted to absorb this information BEFORE calling the Fed to task. Certainly, an electorate alert to the possibility of being misled by demagogues might want to read a bit of it BEFORE signing petitions and importuning their Congresspeople. Or, for a kind of cliff notes, try a thoughtful and readable article from by IMF analyst Peter Stella, “The Federal Reserve System Balance Sheet: What Happened and Why it Matters.” Moreover, the Fed IS audited by the GAO – it completed 7 specific audit projects in 2008 and another 8 were open at the start of this year. Certain functions, such as transactions with foreign central banks and open market operations, are excluded from the GAO’s audit. Two arguments are advanced for this exclusion – to preserve the Fed’s independence from the vagaries of politics and to preserve the prophylactic action of the discount window facility in preventing banking panics and bank runs. I think they are good arguments – but I’ll save that topic for another time. My point is that the more fevered supporters of the audit-the-Fed campaign speak as if there were no audits, no reports, and no disclosure. For example, the Campaign for Liberty petition, which states:

Whereas the Federal Reserve refuses to give a public accounting of the trillions in recent taxpayer-backed loans; and Whereas, Congress has the responsibility to force a public audit of the Federal Reserve, and the American people deserve to know how their tax dollars are being spent and the currency inflated; and Whereas, allowing the Fed to remain out of control and shrouded in secrecy clearly allows for abuse and the continued stealing of our tax dollars….

On one of the blog sites I visited following this confederacy of misleaders and know-nothings around the web, someone had left in comment a list of specific GAO audits. It was followed by another comment, from a more credulous bloke who said, “If this was true, wouldn’t all these authorities have known it and told us so?” In other words, the GAO can’t possibly have audited the Fed because Congressman Paul hasn’t mentioned it. If you’re not a libertarian, but instead a liberal, let William Greider mislead you: “During the past year, the Fed has flooded the streets with money—distributing trillions of dollars to banks, financial markets and commercial interests—in an attempt to revive the credit system and get the economy growing again.” If that money had actually flooded the streets, it would have done so through the normal process of bank money creation, as they converted the excess reserves created by the allegedly out-of-control Fed into loans to commercial interests and households. Still, Greider is not entirely off base. Residential streets have benefited from the Fed’s activities. About half the net increase in Fed assets over the last year (as of September 17, 2009), is the result of MBS purchases. Those purchases siphoned funds, at sharply lower rates of interest than would have been offered if the decimated ranks of institutional investors had been required to absorb the supply of MBS unaided. The Fed purchases gave a modest boost to home buying and, by lowering mortgage rates, allowed many families to refinance unto lower cost mortgages, avoiding default or increasing their discretionary incomes. Another $42 billion of TALF loans have revived securitization of credit cards, auto loans and other vanilla ABS. But imagine if Congress had a hand in authorizing the MBS purchase and TALF programs. First, the weeks of learning curve. And the partisan debate, likely starting before any particulars are announced. The final, Congressionally authorized program would have looked like the mythical camel – a horse designed by a committee. And arrived 6 months to a year too late. Or worse. If either program inspired the kind of opposition that, say, health care reform has inspired, the only outcome might have been a muddy, bloody battlefield.

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