Will the U.S. Congress finally assert its independence of both the finance industry and party leaders beholden to its goals? This would be bipartisanship of which we could be proud.
The Huffington Post reported late last month that “the House Finance Committee passed a measure to audit the Federal Reserve — for the first time ever. The bill, sponsored by the bipartisan duo of Rep. Ron Paul and Rep. Alan Grayson, was passed over the objections of Chairman Barney Frank — and of the Fed and its big time friends and lobbyists.” More tellingly, a last-minute “compromise” backed by the Fed that would have significantly watered down the bill was defeated.
The Post added: “In normal times, this sort of ‘split-the-difference’ amendment would likely have passed.
But these are not normal times, and the amendment was defeated — much to the shock of the Fed and its supporters.”
During the early days of the financial crisis, a bipartisan coalition of libertarian-leaning Republicans and liberal Democrats voted against Treasury Secretary Henry Paulson’s grab for dictatorial control of the U.S. financial system. That vote, however, was soon followed by enactment of a rescue package that left substantial dis-cretionary power in Treasury’s hands.
More to the point, however, has been congressional inaction in the face of growing evidence of the massive role that the Federal Reserve plays in our economy. Nancy Pelosi professed surprise that the Fed could simply hand AIG an $80 billion bailout package, but this gift is only the tip of the iceberg. The Fed has assumed hun-dreds of billions in questionable (putting it charitably) securities as collateral for loans to megabanks in addition to providing high-risk loan guarantees.
Fed Chair Ben Bernanke complains that an outside audit would compromise its independence. There are several problems with this complaint. The failure of Bernanke and Alan Greenspan to spot the risk of a tech market and then a housing bubble hardly merits confidence in their judgment. At the least, Congress must sanction regulators who fail.
More basically, the notion of Fed independence verges on myth. William Greider points out that “Congress created the Fed in 1913 with the presumption that it would be ‘independent’ from the rest of government, aloof from regular politics and shielded from voters or the grasping appetites of private interests — with one pow-erful exception: the bankers. Government shares its powers with the private banking industry. Bankers collaborate closely on Fed policy. Banks are the ‘shareholders’ who ostensibly own the 12 regional Federal Reserve Banks. Bankers sit on the boards of directors, proposing interest-rate changes for Fed governors in Washington to decide. Bankers also have a special advisory council that meets privately with governors.”
Contrary to media rambling, monetary policy is not a technical matter. Even before the Fed began choosing, secretly, which banks to bail, it made choices as to how to manage trade-offs between economic growth and inflation. How that seemingly technical matter is handled has great consequences for the number of working class jobs and income distribution.
More recently, even before Congress formally repealed the Glass Steagall Act, the Fed de facto breached its wall between commercial and investment banking by unilaterally allowing Citi to become a financial conglomerate.
The climate has never been brighter for reforming the Fed nor have the upsides of reform been greater. As foreclosures and joblessness grow and the inability of smaller banks, which have not been major beneficiaries of Fed largesse, to make loans becomes apparent, the Fed and large investment banks rightly become ever more unpopular. An independent audit would likely reveal expenditure of billions beyond what is necessary to secure insured depositors and systemically vital creditors. In such a context it would be far easier to demonstrate long-term U.S. debt problems are the result of investment banker bailouts, not of programs to modernize our in-frastructure or re-employ state workers.
Maine’s senators profess a belief in bipartisanship and fiscal restraint. Their outspoken role last fall in trimming a stimulus package already too small to employ many Maine workers was the wrong target. Perhaps in the near future they might equally vociferously advocate an independent audit of the Fed, where the worst in-stances of government profligacy lie.
John Buell is a political economist who lives in Southwest Harbor. Readers may reach him at firstname.lastname@example.org.