A bipartisan effort to force transparency on the Federal Reserve is suddenly in jeopardy after a House Financial Services Committee member introduced an amendment that would let the multi-trillion dollar organization continue throwing tax dollars around in secret.
Rep. Mel Watt, a Democrat from North Carolina, has introduced an amendment intended as an alternative to the measure to audit the Federal Reserve introduced by Reps. Ron Paul (R-Texas) and Alan Grayson's (D-Fla.) . But instead of increasing transparency, as the amendment claims to do, Watt's measure would instead make the institution more opaque.
The measure could come for a vote anytime this week. Read the amendment here.
Watt pitched his amendment in a letter to colleagues circulated Tuesday. "While my amendment will certainly fall short of demands by those intent on destroying the independence (if not the existence) of the Fed, the critics of my amendment will have to concede...that my amendment will provide transparency of the Fed's financial operations that will be completely unprecedented," he wrote.
In fact, the critics are conceding no such thing. "The Watt Amendment, as written today, actually places new restrictions on the little authority that exists, such as it is, for independent auditing of the Fed," Grayson said. "It keeps in place all existing restrictions and adds four more. So I don't see why anybody would reasonably think that it creates unprecedented authority to audit the Fed."
The devil, as always, is in the details. While Watt's amendment talks a big game about opening up the Fed to a complete audit, all of the new powers granted must be carried out "each case in accordance with subsections (b) and (e)."
Those subsections of the current law delineate the many restrictions that an auditor confronts when seeking to audit the Fed. Watt's measure not only leaves those in place but requires all audits to abide by them.
And in addition to the current restrictions in place, it creates new ones. An auditor could not look at loans or liquidity arrangements the Fed enters into, the terms of those arrangements, or the effect of those loans and other liquidity deals on "reserves, the balance sheet or financial condition of a Federal reserve bank or the Federal Reserve System."
The Fed has expanded its balance sheet drastically over the last year, entering into exotic swap arrangements and otherwise pumping trillions of dollars into the economy. How it has done so and who has been on the receiving end would remain secret under Watt's bill.
By contrast, the Paul-Grayson amendment is patterned after Paul's bill H.R. 1207, which has broad bipartisan support. It has more than 310 cosponsors in a chamber with 435 members.
Paul's measure would repeal the provisions that Watt's leaves in place. If every member who cosponsored Paul's bill votes for it in committee this week, it would have the votes to pass. Watt's amendment is an effort to peel off votes.
Paul spokesman Jesse Benton said that Watt's proposal falls far short of the transparency that the multi-trillion dollar organization needs.
"The new exemptions are described as limited but they are extremely broad," Grayson said. They're so broad, in fact, that there would be very little left for an auditor to look into. What could an auditor check up on?
"Count the pencils on the desks," Grayson speculated. "Perhaps check on proper Metro card usage."
Watt wasn't immediately available, but his letter to colleagues is here:
Dear Financial Services Committee Colleague:
This week during the Financial Services Committee markup of the Financial Stability Improvement Act of 2009, I plan to introduce an amendment to provide historic transparency to the operations of the Federal Reserve. While my amendment will certainly fall short of demands by those intent on destroying the independence (if not the existence) of the Fed, the critics of my amendment will have to concede (1) that I have worked diligently with them to find all possible common ground and (2) that my amendment will provide transparency of the Fed's financial operations that will be completely unprecedented.
My amendment acknowledges that taxpayers have a right to know how their money is being spent. To that end, my amendment will expand the audit powers of the Government Accountability Office ("GAO") over the Federal Reserve to all financial activities of the Fed.
I. Complete GAO Audit Authority of the Numbers.
Under my amendment, the GAO will have complete authority to review and audit, including by onsite examination:
(1) Federal Reserve programs, activities and operations: A full audit of the functions, programs, activities and operations of the Federal Reserve Board and Federal reserve banks relating to prudential supervision, provision of currency, check clearing and collection services, payment systems operations and provision of wire transfer services;
(2) Federal Reserve financial statements: A full audit, of the kind performed by outside auditors, of the Federal Reserve's financial statements, including all the Fed's assets and liabilities no matter how they are acquired or incurred; and
(3) "Emergency" 13(3) lending facilities: An audit of the emergency actions taken by the Fed under Section 13(3) of the Federal Reserve Act ("13(3) powers") to extend credit to a single partnership or corporation, or broad liquidity facilities for distressed markets, including:
* The effectiveness of the Fed's internal control structure to ensure limited risk exposure to the Fed with respect to each liquidity facility and the prevention of waste, fraud and abuse in the use of that facility;
* Whether the collateral policies and procedures appropriately address risk to the Fed;
* Whether credit extended and fees charged by the Fed are collected in accordance with the terms and conditions established by the Fed;
* The manner in which the Federal Reserve system accounts for the facility on its balance sheet and the adequacy of the procedures for financial reporting.
For example, my amendment would allow the GAO to audit the financial aspects of multi-billion dollar credit facilities extended to Bear Stearns and AIG during last year's financial crisis, as well as the broader market credit facilities such as the Term Asset-backed Loan Facility (TALF). In addition, the specific names of borrowers of 13(3) credit facilities would be disclosed after 1 year.
In sum, the GAO will have new powers under my amendment to audit every aspect of the Fed's nearly $2 trillion balance sheet, providing unprecedented transparency to the American people.
II. No Interference with Monetary Policy.
The critics of my amendment will say that it does not allow the GAO to audit or second guess Fed monetary policy decisions. They are correct. My amendment strikes a sensible balance between providing increased transparency to the public, while preserving the long-standing independence of the Federal Reserve regarding the making of monetary policy. Every industrialized nation observes strict independence of their central banks to set monetary policy and shields them from undue political interference. Such independence from political interference is important for several reasons:
* An independent central bank can limit inflation and promote economic growth. If there is even the perception that politics is interfering with monetary policy decisions, fears of inflation could rise and erode market confidence in the ability of the central bank to make sound economic decisions, which could cause higher prices and increased job losses;
* Bond rating agencies view the independence of central banks as an important factor in determining sovereign credit ratings. An erosion of Federal Reserve independence could harm the credit rating of Treasury bills, increasing our cost of borrowing and hurting the economy in the form of higher prices to all American consumers;
* Foreign central banks would fear engaging in transactions with a politically compromised Federal Reserve, which could destabilize the U.S. and international economies.
Recently, over 400 economists, academics and former government officials signed the attached petition supporting the independence of the Federal Reserve regarding monetary policy. The petition included three winners of the Nobel Prize in economics and five former presidents of the American Economics Association. The notion that we should allow the GAO or any other government agency to audit or second guess Fed monetary policy is nonsensical and would be terrible public policy.
My amendment strikes the appropriate balance of increasing Federal Reserve transparency while preventing political interference with monetary policy. Only a transparent central bank, free from political interference, can effectively carry out its congressionally-required dual mandate of stable prices and fostering job growth. I hope you will support the amendment to provide an historic advance of transparency at the Federal Reserve while preserving its independence to be able to fulfill the dual missions for which it was formed.
MELVIN L. WATT