House committee adopts Paul amendment strengthening Fed audit bill


By Scott Lanman
Bloomberg News
Friday, November 20, 2009

WASHINGTON -- The Federal Reserve's shield from congressional audits of interest-rate decisions took a blow from lawmakers who want to open the central bank's books to greater congressional scrutiny.

The House Financial Services Committee yesterday advanced a proposal to remove a three-decade ban on audits of monetary policy and carry out an examination of the central bank. The plan was offered by U.S. Rep. Ron Paul, a Republican from Texas who has called for the abolition of the Fed, and based on a bill with more than 300 co-sponsors.

Lawmakers say the Fed hasn't adequately accounted for putting taxpayer funds at risk, including aid to companies such as Citigroup Inc. and American International Group Inc. Fed Chairman Ben S. Bernanke has opposed the Paul legislation, saying it may open the door to interference in monetary policy.

Yesterday's vote is "probably not going to be helpful in terms of keeping inflation expectations low and supporting the dollar," said Michael Feroli, a JPMorgan Chase & Co. economist in New York and former Fed researcher. The central bank "should do whatever it takes to stop this from going forward and eroding confidence in the Fed's independence," he said.

The broader bill on financial regulation is subject to a vote by the committee, then must be approved by the House and Senate and signed into law by President Barack Obama.

"This is the bill that would allow the people to win over the special interests," Paul said during debate on the measures yesterday. "There is no doubt that the individuals opposing this amendment represent the secrecy of the Federal Reserve." An audit "shouldn't hurt them in any way," he said.

Rep. Barney Frank, the Massachusetts Democrat who chairs the committee and opposed the Paul measure, said the issue "may be revisited" when the legislation reaches the House floor.

"It's going to be seen as weakening the independence of monetary policy with consequent negative implications," Frank told reporters after the vote. "People are going to be worried about the impact on the dollar, on the interest rate."

The dollar strengthened to $1.4925 per euro late yesterday from $1.4963. The dollar has weakened 6.5 percent against the euro this year.

Paul, who wrote a best-selling book this year titled "End the Fed," said provisions in his amendment would limit interference in monetary policy. The measure, co-sponsored by Rep. Alan Grayson, a Democrat from Florida, would exclude any unreleased transcripts or minutes of Fed policy meetings. It calls for an audit of the Fed and its 12 regional banks by the Government Accountability Office within a year after enactment.

The committee voted first, 43-26, to substitute Paul's proposal for a Democratic measure to retain the ban on audits of monetary policy while requiring more limited audits. About one- third of Democrats joined the unanimous Republicans on the vote. Then, in a voice vote, the committee attached the Paul measure to the broader bill.

Frank said he expects to finish the legislation in committee on Dec. 1, delaying a vote he had scheduled for yesterday until after lawmakers return from the Thanksgiving holiday. He supported a competing measure from Rep. Mel Watt, a North Carolina Democrat, to retain the ban on auditing monetary policy.

"Perception is very important in monetary policy," Frank said. He said he was concerned that "inflationary expectations will be given a boost if we adopt the Paul" measure.

The Fed's powers and rate-setting independence are under threat on several fronts in Congress. Separately yesterday, the Senate Banking Committee began debate on legislation that would strip the Fed of bank-supervision powers and give lawmakers greater say in naming the officials who vote on monetary policy.

Paul and other lawmakers have accused the Fed of lax oversight of banks and failing to avert the financial crisis. He said Watt's measure instead would put further restrictions on the power of the government to audit the Fed, contrary to its sponsor’s assertion.

"This actually takes away some auditing authority," said Paul. "This amendment eliminates all the benefits that people see coming from" Paul's legislation, he said.

Watt cautioned against succumbing to popular anger at the Fed during debate on the measures.

"Everybody would like to beat up on the Fed and call them the bad guys," Watt said. "So if we make this decision on a political basis, I know what the result will be."

Also yesterday, lawmakers attached, by voice vote, a separate Republican measure to audit all Fed emergency-loan actions "during the current economic crisis." Legislators may need to work out how to combine the amendments when the bill goes to the House floor.

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