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Leashing the Fed

Until 9 months ago, I was a huge fan of the Fed.  The Fed had delivered a performance unmatched by any other central bank in the world.  Where they perfect - no, but they were simply the best.

My opinion changed during our current crisis.  They took steps which I believe required public debate.  The most controversial one involved quantitative easing - mass purchasing of treasuries.

Monetary expansion is a function of a fractional reserve system - and it normally occurs at inside our banking system.  To prevent seizing of the economy, the Fed expanded the money supply at their level.  The amount of money created is in the trillions.

Things happened.  There are now questions about who said what, why what happened.  There has been a call to audit the Fed - a full audit.

On July 9, 2009 Vice Chairman Donald L. Kohn appeared Before the Subcommittee on Domestic Monetary Policy and Technology, Committee on Financial Services concerning Federal Reserve independence.   

He has made two points:

.....the supervisory and regulatory functions of the Federal Reserve are subject to audit by the GAO to the same extent as the supervisory and regulatory functions of the other federal banking agencies. Thus, the GAO has full authority to--and does in fact--audit the manner in which the Federal Reserve supervises and regulates bank holding companies on a consolidated basis. Moreover, if the Congress were to provide the Federal Reserve with responsibility for serving as the consolidated supervisor of systemically important financial firms that are not bank holding companies, the GAO would, under existing law, have full authority to audit the Federal Reserve’s supervision and regulation of such firms as well. We would expect the GAO to actively use that authority, as it does today. Indeed, as of June 29, 2009, the GAO had 19 engagements under way involving the Federal Reserve, including 14 that were initiated at the request of the Congress. In addition, since the beginning of 2008, the GAO has completed 26 engagements involving the Federal Reserve, including engagements related to the Basel II capital framework, risk-management oversight, the Bank Secrecy Act, and the Board’s Regulation B, which implements the Equal Credit Opportunity Act.

The Congress, however, has purposefully--and for good reason--excluded from the scope of potential GAO audits monetary policy deliberations and operations, including open market and discount window operations, and transactions with or for foreign central banks, foreign governments, and public international financing organizations. By excluding these areas, the Congress has carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining the independence of the central bank’s monetary policy functions and avoiding disruption to the nation’s foreign and international relationships.

Well, Mr. Kohl - my response to you is that you have broken the trust.  it does not matter what the reasons are for confidentiality.  Every now and then in a democratic country all the cards must be laid out so that trust can be re-established.

It is now time for a full audit of the Fed.