This is not an ordinary election year in many ways. For one, it’s not really an election year – the actual voting doesn’t happen until 2016. It’s also going to be the first Presidential election without Obama since 2004 as the White House becomes open.
But more importantly, everyone seems to understand that the economy and the politics of this nation are both changing. Stuff is seriously up for grabs. A desperate cry for attention might make all the difference.
Enter into this a bid for more Congressional oversight of the Federal Reserve, an idea backed by no less than 30 Senators, 3 of which are clearly running for President. It seems like a good idea all around – what can be wrong with more oversight? That depends on what’s being overlooked now, of course, and what can be done with existing law.
Plus, of course, we have the omnipresent Fed itself. Does it need to be reigned in?
To understand the need to regulate the Fed we have to start with what it does now and who it has to report to. Janet Yellen, the current Chair, has introduced a period of remarkable openness where her policy terms are announced months in advanced based on key economic indicators. As the most powerful person in the world Fed Chair Yellen is doing a remarkable job of being transparent in this key area. But what else does the Fed do?
The Federal Reserve has four main responsibilities:
- To be the “lender of last resort” in the case of economic panic of financial meltdown,
- To act as the clearing house for all checks and bank wire transfers,
- To regulate and supervise US banks in accordance with US law, and
- To maintain the value of the US Dollar through monetary policy.
All of this is subject to Congressional oversight – which is absolutely never put into practice beyond the Fed Chair’s biannual testimony.
Monetary policy is the big deal, the one everyone focuses on. It is decided at the “Open Market Committee Meeting” where the 12 Governors from the regional Federal Reserve Districts (as pictured) decide, with the Chair, what their “Federal Reserve Funds Rate” will be. This is what they charge banks on overnight loans and, as such, influences the loans those banks in turn charge to commercial lenders.
The rest of the functions are never in question, but they should be. The Fed as a regulatory arm has set up a cozy relationship that has clearly given banks far too much leeway. The decision to give this power to the Fed was a decision to take bank regulation away from the messy world of politics. It appears to mean that, in practice, there is little pressure to enforce regulations and banks can get away with an awful lot.
But that’s not what is in contention here.
The proposal at hand is to “Audit the Fed”, which is to say conduct a full scale review of their books. The legislation, as discussed publicly, is all about checking over the books to be sure that it’s all in place. It sounds like a great idea, and an independent audit should be welcomed by everyone.
There’s only one problem – Congress could do that with the power it has already.
It’s unclear exactly what new powers would be given to Congress under the legislation proposed. Under Dodd-Frank, the detailed minutes of all Federal Reserve Open Market Committee meetings are released within two years. Everything the Fed does is relayed in a dizzying number of charts, graphs, and reports – much of which is available at the St Louis Federal Reserve’s website.
If you want to know what the Fed holds, that’s also easily available. They have $2.5T in US Treasury Bills on the books, for example, and you can see how that number has grown over time:
What exactly that means is always an open question, of course. When the US Government pays interest to the Fed, where does it go? Can’t the Fed simply forgive these US Bonds and let us off the hook? They are the ones who print the money, after all, and owing them some of it back is a head-scratching problem – especially when the amount owed is so incredibly large.
We have the numbers already, and nothing is going to give us more information. What the numbers mean is the hard part.
But none of this is under consideration at this time. The call is for more openness from the Fed, which is arguably more open than most of the Federal Government. It certainly tells us an awful lot more about where the money goes than the Defense Department, for example, which has proven to be unauditable.
It’s an easy political call to write a bill that lifts the veil of secrecy and promises to reveal who the man behind the curtain is. The problem with this is that we know who is behind the curtain, and she’s a woman named Janet Yellen. Nothing is secret, and there are no mysteries.
There is a problem that very few people understand what is going on, but you can’t legislate your way through the mountains of detail that already exists.
If someone wants to propose that the Fed be stripped of its regulatory power in favor of a tough organization with a strong criminal investigation arm, by all means let’s have at it. But to simply audit the Fed? We can do that now. Let’s do it and put aside all the showmanship. There are other things we can worry about ahead of 2016.