Led by Rep. Ron Paul (R-TX) and Sen. Bernie Sanders (I-VT), legislation mandating a thorough audit of the Federal Reserve is moving through Congress. The proposal would eliminate many exemptions in the current annual audit and include a wider examination of the Fed’s operations.
Given the enormous commitment of current and future taxpayer dollars—$12.7 trillion—to remedy a credit crisis many people trace in large part to Federal Reserve policies, there is a growing call to show the public how the Fed conducts its business. This is currently a tightly guarded secret.
Anthony Randazzo, director of economic research for the Reason Foundation, notes “a semi-private central bank with powers like the Fed should be subject to some kind of oversight. The interest rates—or ‘discount rate’—dictated by the Fed have incredible power to move markets. As is now evident in retrospect, the Federal Reserve was complicit in helping the development of a ‘housing bubble’ by keeping interest rates too low for too long.
“With this kind of sway, it is natural for Congress and American citizens to want to know how the Federal Reserve, or more specifically the Federal Open Market Committee, makes its decisions,” Randazzo added.
Fed Fears Bank Panics
The Fed’s main argument against transparency is possible economic harm if certain financial information about the institutions it is working with becomes public. Fed officials argue the market would attach a stigma to institutions receiving loans or other assistance from the Fed, and if the names of those banks—or their financial condition—were revealed, bank panics could ensue.
During testimony before the House Financial Services Committee in September, Federal Reserve General Counsel Scott Alvarez said an audit of the Fed could “cause the markets and the public to lose confidence in the independence of the judgments of the Federal Reserve.”
Randazzo agrees this concern may be valid and that a complete public audit could disturb financial markets.
“Because the Fed has this immense power, every word in its periodic statements is very carefully chosen. The markets pay close attention to the words of the Fed and react in rapid and sometimes devastating speed on even a hint of negativity,” Randazzo said. “Too much transparency would create severe market volatility. Given this complexity, it would probably be beneficial to know what inflation level the Fed is targeting, but a complete public audit of all its internal statements would be problematic.”
Secrecy Could Harm Markets
Some supporters of increased transparency disagree. Brian Costin, assistant government relations director of The Heartland Institute, publisher of this newspaper, says the Fed’s refusal to reveal who receives government funds may already be harming the market.
“Without information from the Federal Reserve, the market will be unable to effectively clean out the malinvestments of the inflationary boom caused by the Federal Reserve’s artificially low interest rates,” Costin said.
Costin believes the federal government’s increasing role in the economy demands greater transparency.
“For markets to perform well, and for society to allocate scarce resources efficiently, we must have full information on the biggest peacetime intrusion by the federal government into the U.S. economy in our nation’s history,” Costin said.
Costin says two questions ought to be asked about the role of the Federal Reserve: One, should the government be bailing out failing companies with taxpayer dollars; and two, how much control should the government have over private investment?
Paul Sees Inflation Ahead
Paul’s new book, End the Fed, argues printing trillions of new dollars, as the Fed has done in recent years, could eventually lead to price inflation, with the value of the dollar shrinking at a rate the United States hasn’t seen since the late 1970s. With every new infusion of dollars into the global money supply, he argues, the buying power of the dollars in every American’s bank account falls significantly.
The book debuted in September at Number 2 on Amazon.com and at Number 6 on The New York Times and Wall Street Journal bestseller lists.
Matthew Glans ([email protected]) is a legislative specialist in insurance and finance at The Heartland Institute.