Audit would infringe on Fed's independence, its lawyer tells House


Knowledge is power, and the Fed wants to keep it all.

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By David Lawder and Mark Felsenthal
Friday, September 25, 2009

WASHINGTON -- Letting a U.S. agency audit Federal Reserve monetary policy decisions would undermine the U.S. central bank's independence and could hamper its ability to control borrowing costs and support the dollar as the world's reserve currency, a Fed official said on Friday.

Lawmakers are considering a measure that would let the Government Accountability Office, an investigative arm of Congress, review the Fed's decisions on monetary policy, in which the central bank sets targets for interest rates. The audits also would cover the Fed's discount window and open market operations.

"Enactment of the bill would tend to undermine public and investor confidence in monetary policy by raising concerns that monetary policy judgments in pursuit of our legislated objectives would become subject to political considerations," Fed General Counsel Scott Alvarez told the House of Representatives Financial Services Committee.

"These are not audits in the sense that a CPA or accountant would conduct an audit. They are really policy reviews, they are reviews that often times are involving interviews or depositions of participants, looking at records and coming to an independent policy judgment," Alvarez said, adding that the Fed's decisions could be seen as reacting to GAO findings and congressional criticism.

The Fed has been under fire from Congress because of its actions to prop up financial firms during the financial crisis that sent the U.S. economy into recession and the expansion of its balance sheet to $2 trillion in obligations without lawmaker approval.

A long-time critic of the Fed system, Rep. Ron Paul, a Republican from Texas, proposed subjecting the Fed's policymaking to GAO scrutiny, and his bill has gained broad support. The House is debating Paul's proposal as part of broader measures to reform U.S. financial oversight and rules in the wake of lapses that contributed to the crisis.

Alvarez said Paul's measure, if enacted, would raise questions about the Fed's ability to act free from political pressure.

"Financial market participants likely would see this as a substantial erosion of the Federal Reserve's monetary policy independence," and undermine investor confidence in the U.S. central bank, Alvarez said.

He said the GAO audits would chill the "unfettered and wide ranging policy debates" among Fed policy makers and reduce their effectiveness.

Alvarez also said the proposal also could disrupt relationships with foreign central banks and governments, who would likely balk at entering into transactions with the Fed if they would be subject to such a review.

"These transactions, such as the deposit of international reserves and bilateral currency swap arrangements, help support the role of the U.S. dollar as a worldwide reserve currency and alleviate stresses in U.S. financial markets," he said.

Alvarez said the GAO had completed 14 audits of the Fed in areas that included consumer protection and has 14 additional audits in process.

However, the Fed's top lawyer said he had no objections to audits and controls on the use of special lending powers invoked to bail out Bear Stearns and American International Group last year and make loans to broker-dealers. This authority under section 13-3 of the Federal Reserve Act allows the Fed to take such actions if they identify unusual and exigent circumstances.

Rep. Barney Frank, the influential chairman of the Financial Services committee, said any audit authority over the Fed should be part of an overall regulatory reform package that considers the Fed's future role as a systemic risk regulator or shifts its consumer protection functions to a new agency. This also should place some new controls on the 13-3 authority, which greatly expanded the Fed's activities during the financial crisis.

Alvarez added that he believed that if Congress provided so-called resolution authority to he government to seize and wind down large, systemically important failing institutions, the special 13-3 rescue authorities may not have been necessary.

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