One-Time Audit the Fed Passes the Senate 96-0

Senator David Vitter’s amendment to audit the Federal Reserve failed by a vote of 37 to 62. However, Senator Bernie Sanders worked out a compromise to conduct a one-time audit of the Fed. That vote passed 96 to 0.

“At a time when the Federal Reserve has provided the largest taxpayer bailout in the history of the world, the largest financial institutions in this country, trillion-dollar institutions,” Mr. Sanders said in a floor speech, “the Sanders amendment makes it clear that the Fed can no longer operate in the kind of secrecy that it has operated in forever.”
He added, “For the first time the American people will know exactly who received over $2 trillion in zero or virtually zero-interest loans from the Fed, and they will know the exact terms of those financial arrangements.”
Mr. Sanders, a self-described socialist, has long demanded greater transparency at the central bank, and his original plan could have subjected the Fed to ongoing audits of some routine operations. But he agreed to scale back the proposal in the face of opposition by the White House, the Fed, the Treasury and some Senate colleagues.
The critics said that more aggressive audits would impede on the Fed’s independence and potentially interfere with its ability to set monetary policy. Mr. Sanders and other proponents of fuller audits of the Fed rejected those assertions and said they were providing sufficient safeguards to protect the central bank’s integrity.

This issue seems to confuse many people. In a traditional sense, the Federal Reserve is already audited. Current law bars an audit of the Fed’s open market operations. The belief is that such an audit would undermine the Fed’s independence.
The idea is that auditing the Fed’s open market operations would really serve as a policy veto. I’ll give you an example. Let’s say you conduct an audit of the Department of Bureaucracy. The auditors room through the books and find out that the DOB spent $1.2 million on a ham sandwich. You’ll notice that this is in no way a policy decision. The auditors have made a judgment that this was too much too spend for a ham sandwich. But the Federal Reserve is a different animal. Perhaps it was the Fed’s intent to buy a ham sandwich for $1.2 million. Sure, it may sound crazy but this is what central banks do. That was the policy decision. What the Fed does is buy and sell stuff so an audit (so the argument goes) opens up auditors to not merely audit, but question the Fed’s policy decisions. Those policy decisions (again, so the argument goes) are already held accountable when the Fed Chair appears before Congress.
Personally, I think the Fed’s independence is given a level of sacredness it doesn’t deserve. Quite simply: If the people want 20% inflation, they should get it. The Fed is a creation of Congress and Congress should be able to do whatever it wants with the Fed. The central bank is not independent. I fail to see why it’s so important that the Fed “remain independent.” I would agree that the Fed needs latitude to act, but not independence.

Posted by on May 11th, 2010 at 1:11 pm


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