Dysfunctional Congress Takes Aim at the Fed
Anyone expecting the mild-mannered Federal Reserve Chairman to be treated with kid gloves at her semi-annual congressional testimony last week was mistaken.
On the Senate side, Massachusetts Senator Elizabeth Warren drilled Janet Yellen on regulatory issues, interrupting her several times to ask if she agreed with Fed general counsel Scott Alvarez's public opposition to two Dodd-Frank rules.
The House hearing was even more contentious, featuring accusations of partisanship, best exemplified by Yellen's regular weekly meeting with (drum roll) the Treasury secretary!
Both Houses devoted a good deal of attention to the Federal Reserve Transparency Act of 2013, championed by Kentucky Senator Rand Paul. Better known as Audit the Fed, the legislation would subject the central bank to additional oversight on, and intrusion into, its monetary policy decisions. A similar bill, introduced by Rand's father and former Texas congressman Ron Paul, passed the House in 2012.
Is there any entity less suited to exercise its influence over monetary policy than the U.S. Congress? You would think lawmakers had better things to do with their time than push for increased oversight of an institution that responded aggressively, albeit belatedly, to the 2007-2009 financial crisis. A short congressional to-do list might include funding the Department of Homeland Security, passing an annual budget, simplifying the tax code, reforming entitlement programs before they go broke and overhauling immigration policy.
The idea of auditing the Fed would be less laughable if the Fed weren't already one of the most highly audited institutions. The Government Accountability Office audits open-market operations and discount window lending. Subsequent to the financial crisis, the GAO now conducts a full audit of any emergency lending authorized under Section 13(3) of the Federal Reserve Act. The Fed's annual financial statements are audited by an independent accounting firm. The Fed releases a report on its balance sheet every Thursday at 4:30 p.m. It even reports "on a security-by-security basis" all of its portfolio holdings on the New York Fed's website, Yellen told the Senate Banking Committee last week.
In case his colleagues didn't understand the real thrust of the bill to audit the Fed, Republican Senator Bob Corker laid it out in plain English. Because the Fed is already highly audited, the bill is really "an attempt to allow Congress to be able to put pressure on Fed members relative to monetary policy," he said. He called the legislation "not a particularly good idea" as it would "cause us to put off tough decisions for the future, like we currently are doing with budgetary matters."
Bingo. No surprise that Yellen concurred with his assessment.
Most countries have come to the conclusion that an independent central bank is the best defense against inflation, which can serve as an escape hatch for spend-thrift governments that can't pay their bills. Do you want to entrust the 535 members of Congress with supervising, in real time, the Fed's actions as lender of last resort during a crisis? At least we can be glad that the Fed is self-financing.
Members of Congress may understand something about the economic effect of tax cuts and spending increases, but even then it's more a matter of partisan ideology. Outside of a handful of lawmakers who have studied the dismal science, I suspect they know as much about the mechanics of monetary policy - about the money multiplier, fractional reserve banking, required and excess reserves, the velocity of money - as they do about black holes. These folks can't even conduct fiscal policy in a timely manner. Monetary policy is much too important to be left to politicians.
Some of the impetus for legislation to increase oversight of the Fed is coming from those who long for a return to the gold standard and see no purpose for a central bank. (See Paul, pere et fils.) Others want the Fed to adhere to a rules-based policy. Still others object on principle to the Fed's zero-interest-rate policy, which at six years and counting has still not produced the predicted hyper-inflation.
Then there are those who hold the Fed responsible for everything that ails the economy -- and are determined that they can do better.
"I, for one, believe Fed reforms are needed," declared House Financial Services Committee Chairman Jeb Hensarling. "I, for one, believe Fed reforms are coming."
Without the Fed's aggressive actions to facilitate credit intermediation during the crisis, the financial system might have succumbed. Neither Wall Street nor Main Street would have had access to necessary financing.
If lawmakers are really interested in inserting themselves to a greater degree into economic policy-making they might want to do a little self-assessment, or self-auditing. They could start by subjecting pork-barrel spending to more stringent oversight. They could hold themselves to a higher standard, such as pay for performance. And, most important of all, they could enact term limits. That would be a more constructive use of their time than trying to inflict their dysfunctional operating system on policy-making by the Fed.
Caroline Baum is a contributor to e21. You can follow her on Twitter here.
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