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Plan for Congressional Audits of Fed Dies in Senate

Published: May 7, 2010
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Source: Wall Street Journal

Edtiors Note: Food For Thought Was Yesterday’s Stock Market “Glitch” Really Big Banking Blackmail?

Last-minute maneuvering in the Senate allowed the Federal Reserve to sidestep legislation that would have exposed its interest-rate decision-making to congressional auditors.

Pressure from the Obama administration led Senate lawmakers to alter a provision pushed by Sen. Bernie Sanders (I., Vt.) that was gaining momentum despite opposition from the Treasury and the Fed. It would have largely repealed a 32-year-old law that shields Fed monetary policy from congressional auditors.

The compromise, endorsed by Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and the Treasury, would require the Fed to disclose more details about its lending during the financial crisis. It would also require a one-time audit of those loans and a one-time review of Fed governance. A formal vote was pushed back until next week.

Thursday's Senate showdown came after senators on the left and right joined forces to support Mr. Sanders' provision.

"At a time when our entire financial system almost collapsed, we cannot let the Fed operate in secrecy any longer," Mr. Sanders said. "The American people have a right to know."

But Fed Chairman Ben Bernanke, while insisting on a commitment to "openness" at the Fed, said in a letter to Congress the Sanders measure would "seriously threaten monetary policy independence, increase inflation fears and market interest rates, and damage economic stability and job creation."

Deputy Treasury Secretary Neal Wolin, in a statement, endorsed the revisions to the Sanders provision, saying they would provide a comprehensive audit of the Federal Reserve Board's operations in response to the financial crisis, "while preserving the existing protections of the Federal Reserve's independence with respect to monetary policy."

A House bill sponsored by Rep. Ron Paul (R., Texas) that passed in December contains a proposal similar to the original Sanders measure. If the Senate bill passes, it will need to be reconciled in a conference committee. That keeps the pressure on the Fed alive for the coming months.

The original Sanders measure stated that it shouldn't be "construed as interference in or dictation of monetary policy." But the Fed and administration warned that would allow auditors to interview Fed policy makers and staffers about monetary policy, thereby allowing congressional critics to pressure the Fed and undermine its independence.

Like most other capitalist democracies, U.S. politicians have given the central bank considerable latitude to control interest rates on the theory that elected politicians are prone to keep rates too low to get more growth during their terms at the cost of more inflation later. Although sponsors of legislation insisted that wasn't their intent, the Fed and its allies said otherwise.

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