On Auditing the Fed: The Doddering Senate
by Gary North
Retiring Senator Chris Dodd’s financial reform bill is now open for debate in the U.S. Senate. For the next few weeks, the public will be treated to media sound-bite snippets of Senatorial debate on various aspects of the Senate version of the reform bill. The bill is supposedly designed to prevent a replay of the 2008 crisis, in which 75 years of Federal financial reform laws proved utterly useless in preventing the crisis.
Rule: Whenever Federal regulation fails to prevent the negative outcome that has just come out, Congress adds more regulation.
Rule: Whenever a Federal regulatory agency or Government-licensed monopoly (read: Federal Reserve System) fails to prevent a disaster, Congress then transfers more power to that agency. This usually is accompanied by an increase in its budget. Of course, Congressional authorization of an increased budget is unnecessary for the Federal Reserve System, which keeps whatever money it wants in order to fund its operations, and then decides, based on an audit by a firm hired by the FED and answering only to the FED, regarding how much money it will repay to the Treasury each year.
Result: Another unforeseen crisis, probably worse than the crisis that triggered the reform legislation.
We have seen it all before. We will see it all again. Congress never learns. Voters re-elect Congress. The bureaucrats understand this. The system rolls on . . . toward the cliff.
WHAT IS AT STAKE?
In February, 2009, Congressman Ron Paul introduced a bill to audit the Federal Reserve System. He has been introducing bills ever since the summer of 1976, his first six months in office (he was elected in a special late-term election). No bill of his had ever previously received a majority of votes.
In introducing his bill, he made this announcement:
I rise to introduce the Federal Reserve Transparency Act. Throughout its nearly 100-year history, the Federal Reserve has presided over the near-complete destruction of the United States dollar. Since 1913 the dollar has lost over 95% of its purchasing power, aided and abetted by the Federal Reserve’s loose monetary policy. How long will we as a Congress stand idly by while hard-working Americans see their savings eaten away by inflation? Only big-spending politicians and politically favored bankers benefit from inflation.
That was a frontal assault on the FED. It was clear that he had more in mind than just an audit.
Since its inception, the Federal Reserve has always operated in the shadows, without sufficient scrutiny or oversight of its operations. While the conventional excuse is that this is intended to reduce the Fed’s susceptibility to political pressures, the reality is that the Fed acts as a foil for the government. Whenever you question the Fed about the strength of the dollar, they will refer you to the Treasury, and vice versa. The Federal Reserve has, on the one hand, many of the privileges of government agencies, while retaining benefits of private organizations, such as being insulated from Freedom of Information Act requests.
He has been attacking the FED from his first months in office. He has long been known as the heir of populist Democrats, such as Wright Patman, whose name he invoked in his brief speech. But the populists are promoters of full Congressional control over money. They oppose both the gold standard and the FED. They want fiat money. Paul opposes the FED, opposes fiat money, and favors a gold standard.
He raised the question of the FED’s secret international agreements.
The Federal Reserve can enter into agreements with foreign central banks and foreign governments, and the GAO is prohibited from auditing or even seeing these agreements. Why should a government-established agency, whose police force has federal law enforcement powers, and whose notes have legal tender status in this country, be allowed to enter into agreements with foreign powers and foreign banking institutions with no oversight? Particularly when hundreds of billions of dollars of currency swaps have been announced and implemented, the Fed’s negotiations with the European Central Bank, the Bank of International Settlements, and other institutions should face increased scrutiny, most especially because of their significant effect on foreign policy. If the State Department were able to do this, it would be characterized as a rogue agency and brought to heel, and if a private individual did this he might face prosecution under the Logan Act, yet the Fed avoids both fates.
What applies to its international agreements also applies to its bailout of specific American banks. This secrecy must end.
More importantly, the Fed’s funding facilities and its agreements with the Treasury should be reviewed. The Treasury’s supplementary financing accounts that fund Fed facilities allow the Treasury to funnel money to Wall Street without GAO or Congressional oversight. Additional funding facilities, such as the Primary Dealer Credit Facility and the Term Securities Lending Facility, allow the Fed to keep financial asset prices artificially inflated and subsidize poorly performing financial firms.
He called for an official audit by the one government agency that possesses legal authority over all government agencies, with the exception of the CIA and the National Security Agency: the GAO or Government Accountability Office.
By opening all Fed operations to a GAO audit and calling for such an audit to be completed by the end of 2010, the Federal Reserve Transparency Act would achieve much-needed transparency of the Federal Reserve. I urge my colleagues to support this bill.
Incredibly, his colleagues did exactly that. He was able to gain 319 co-sponsors for H.R. 1207. This stunned the leadership in the House. It has stunned the Board of Governors of the Federal Reserve. Nothing like this had happened since 1914, when the FED began operations.
Barney Frank bottled up the bill in committee. Then an alternative bill was proposed, one which gutted Paul’s bill. It was defeated in committee, to the amazement of the Democrats’ leadership – and also the Republicans’ leadership.
The bill was not allowed to be discussed on the floor of the House. Instead, it was incorporated into the House’s version of the financial reform law. There was a strategy behind this. The Senate version of the banking reform bill has no FED-audit provision. If the bill passes the Senate, Paul’s audit section of the House bill will be removed during the bill-reconciliation process.
The FED will remain in charge.
WHAT WILL THE SENATE DO NOW?
On July 10, 2009, I wrote an article on the Senate’s vote to kill a similar bill, introduced by Jim DeMint. It was a rider on a spending bill. It was defeated on July 6, 2009. To understand why Dodd’s bill has avoided the FED-audit issue, it may help you to read what I wrote in 2009.
The Federal Reserve runs finance, and, through finance, the economy. Congress and the President go through the motions of being in charge, but it’s an illusion – one that the FED prefers. But when push comes to shove – extremely rare – the FED insists on its integrity as independent of the government. It runs the economy based on a government-established legal monopoly over the money supply, yet it is supposedly independent of government.
It’s a sweet deal.
Congress dutifully goes along.
And then, briefly, it didn’t. Well, half of Congress didn’t.
When the House of Representatives got enough co-sponsors to pass Ron Paul’s bill to audit the FED (bottled up by Barney Frank in committee), I knew the Senate would not. If, somehow, it got through the Senate, Obama would veto it.
Why? Because the right to audit is part of the right to set policy. This, the FED will not tolerate, except hypothetically.
The rider was rejected by the Senate because it implied the right to set policy. Technically, this was not legal, according to Senate rules. Policy riders may not be tacked onto spending bills.
The 12 regional Federal Reserve Banks – privately owned by member banks – are audited annually.
The Board of Governors of FED – a government agency – is audited annually.
The FED hires these auditing firms. This sends the correct signal: The FED is in charge. It’s done on a rotating basis. Rotation makes it easier for the FED to conceal things. There is no single firm with a team that understands all of the digital nooks and crannies.
The FED can say what gets revealed and what doesn’t, such as how much money or Treasury debt was lent/swapped to specific banks.
The FED has established its own standards of accounting. No one cares. Do you think the average House member understands the following language? Of course not.
The Board of Governors has developed specialized accounting principles and practices that it considers to be appropriate for the nature and function of a central bank, which differ from those of the private sector. These accounting principles and practices are documented in the Financial Accounting Manual, which is issued by the Board of Governors. The primary difference between the accounting principles and practices in the Financial Accounting Manual and GAAP is the presentation of all System Open Market Account (SOMA) securities holdings at amortized cost, rather than using the fair value presentation required by GAAP. U.S. government securities and investments denominated in foreign currencies comprising the System Open Market Account are recorded at cost, on a settlement-date basis, and adjusted for amortization of premiums or accretion of discounts on a straight-line basis. Amortized cost more appropriately reflects the Reserve Banks’ securities holdings given the System’s unique responsibility to conduct monetary policy.
This is how all central banks run their balance sheets: book value, not market value. This is why the FED could legally swap at face value marketable Treasury debt for bad loans held by toppling big banks in late 2008.
The House’s co-sponsors want to find out which banks got what. There is no chance that the FED would allow this.
The proposed bill symbolically says that Congress is in control. Legally, this is true. In fact, it has never been true.
Symbols are important. Who is in charge here? The Senate avoided having to pretend to be in charge. The bill was tacked onto a spending bill. It got removed when one member protested.
The FED is in charge whether Congress audits it or not. But the FED wants to preserve the mark of being in charge: hiring its own auditors, not having auditors forced on it by Congress.
The audited numbers are irrelevant. The FED reports the raw numbers accurately. But you must know what to look for, such as the reporting of commercial bank sweeps. The FED does not clarify these issues, the better to deceive the public and Congress. A mere audit will not help much. There must be an audit with explanations. There won’t be.
It’s the fractional reserve banking cartel that is rotten, not the audits. That, Congress neither cares about nor understands.
It’s always nice to gain a symbolic victory, but it’s irrelevant for the economy. The FED is in charge.
The other issue is auditing the gold reserves that the FED says it holds on behalf of the United States government. Is it there? Does it still belong to the FED? The FED will avoid this audit at all costs.
So, where does Congressman Paul think we are in the battle over auditing the FED? He said this in an interview with Lew Rockwell on March 31, 2010:
I don’t expect the Fed to give up easily. I can see them destroying records before a true audit would occur. But like you point out, the real benefit is exposure of the Fed to the general public, and this is very, very healthy because I work on the assumption that we should do everything possible to slow this mess up, do what we can to make positive changes but also work on the assumption that they are probably going to get ahead and drive us into bankruptcy with the destruction of the dollar or a lot more financial chaos then the more people that are informed, the more likely it is that we will resort to sound money and get people to understand why paper money doesn’t work. So, that’s where we are making the progress and as you know, the college campuses have come alive with this issue and I know a lot more people are interested in studying Austrian economics, so I’m very pleased with what’s happening outside of Washington and as far as I am concerned, that’s the only thing that really counts ultimately.
For the first time since 1914, there are millions of voters who are aware of the destructive power of the Federal Reserve System. They want it audited. Paul’s book, End the Fed, is a bestseller. This would have been inconceivable in mid-2008.
This has the FED on the defensive. The Senate will not adopt any FED-audit provision. If the bank reform bill passes, it will go back to the House for reconciliation. There may be a battle over the audit issue, but I doubt it. The House leadership of both parties will agree to remove the section.
The FED is still in control.
If the bill gets to Obama with the audit provision intact, he can simply do what Bush did: write a provision that he will not enforce it. This practice is unconstitutional, but so far no case has gone to the Supreme Court to challenge it.
If any future President attempts to enforce an audit, the New York FED, a private agency that does all of the transactions on behalf of the Board of Governors, will take the case to court. When a Federal judge last summer ordered the Board of Governors to reveal to Bloomberg, LLP which banks got the TARP how much bailout, the Board of Governors appealed the decision. The case is now somewhere in the system.
The FED is in charge. The Federal government does not exercise the control it lawfully possesses. The charade of Congress’ being in charge goes on, as it has since 1914.
The auditing issue will not go away. It will continue to enrage a growing minority of voters.
What is really at stake? The legitimacy of the Federal government. The more legitimacy erodes, the better for the cause of liberty.