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Call for Fed transparency grows louder

Section: Daily Dispatches

By Tom Braithwaite and Francesco Guerrera
Financial Times, London
Wednesday, July 15, 2009

To conspiracy theorists, the Federal Reserve is a dangerous, shadowy, and unaccountable organisation -- like the Central Intelligence Agency but without the black helicopters.

For more than 200 years, central bank critics have railed about an alleged lack of transparency, a threat to the fabric of the US by un­elected moneymen.

For more than 20 years, Ron Paul, the Texan Republican, has been trying to pass a bill that would audit the Fed’s monetary policy decisions. He says US citizens need to know more about the inner workings of the organisation. But he has had little support.

However, in the past 12 months the possibility of more oversight of the Fed has dramatically increased. No longer confined to conspiracy theorists -- or the small libertarian wing of Mr Paul -- it is now the view of mainstream politicians. A majority in the House of Representatives and many in the Senate have decided the Fed needs a tighter leash. "We do not want to politicise our central bank but perhaps they are politicising themselves," says Richard Shelby, senior Republican on the Senate Banking Committee.

Majority opinion has coalesced around more oversight because of a coincidence of economic and political decisions in the Fed and the Treasury. Defenders of free-market capitalism worry about the actions of Ben Bernanke, Fed chairman, who is alleged to have coerced Bank of America into completing its acquisition of Merrill Lynch in spite of mounting losses.

There are opponents to the unconventional monetary policy moves from the Fed, which has vastly increased its own balance sheet and bought mortgage-related securities and Treasury paper in an attempt to restart the flow of credit.

Others, including prominent investors and some regulators, worry about giving the Fed more regulatory authority over the largest financial institutions. "Giving the Fed an oversight role would take away from its central focus, which is monetary policy," says William Donaldson, a former chairman of the Securities Exchange Commission.

There are vaguer fears of skulduggery that Mr Paul outlined as he cross-examined Donald Kohn, Fed vice-chairman, last week. "You say it's the public's interest, I don't think [that] reassures a lot of people because all of a sudden we think, 'What are you doing? Are you protecting the bankers' interests? Are you protecting some international [interests] another government ... another central bank, or what?'"

Advocates of an expanded role for the Fed -- including Tim Geithner, the former New York Fed president who is now Treasury secretary, and Barney Frank, the House financial services committee chairman -- are trapped. Even though the Fed's defenders concede that loose monetary policy contributed to the debt bubble, they are firmly of the belief that it is the only organisation capable of tackling systemic risks and, separately, that its monetary policy independence should not be compromised.

The Fed does not believe the sky will fall in if it faces more audits from the Government Accountability Office but is worried about the more congressional oversight and the potentially chilling effect on its board discussions.

The Fed warns of destabilised markets, higher inflation and long-term interest rates as investors worry about the potential for congressional pressure to keep monetary policy loose.

"Any substantial erosion of the Federal Reserve's monetary independence likely would lead to higher long-term interest rates as investors begin to fear future inflation," Mr Kohn told the financial services committee last week.

His warnings are unlikely to be enough, say both supporters and critics of the Fed in Congress. Barring an unexpected change of mood in both the House and the Senate there will be more oversight ordered by law.

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