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Paul's Fed audit legislation may get action in House
Congress to Debate Bill to Check Fed's Powers
By Tom Braithwaite
Financial Times, London
Friday, August 28, 2009
WAHINGTON -- The Federal Reserve faces more oversight from the US Congress under a bill that will be voted on before the end of the year, according to leading Democrats.
Ron Paul, the Republican congressman from Texas, has attracted wide bipartisan support for legislation that would give Congress a greater check over the Federal Reserve, the culmination of a 30-year campaign.
Ben Bernanke, chairman of the central bank, has warned that any political interference could shake markets, increase inflation and drive up the cost of servicing US debt for generations to come.
The two points of view had seemed irreconcilable and with more than half of the House of Representatives having lent their support to the bill, Barney Frank, the chairman of the House financial services committee, was under pressure to bring it to the floor.
Mr Frank has now decided to move forward a version of the bill and told his constituents at a recent so-called "town hall" meeting that the House would probably approve legislation in October.
That schedule could slip amid a busy agenda for the committee.
But Mr Frank is aiming to bring forward legislation that would safeguard the Fed's monetary policy independence while enhancing transparency and creating checks and balances for the bank's use of emergency lending powers.
"I want to restrict the powers of the Federal Reserve in a number of ways," Mr. Frank told his "town hall" audience. He cited the proposed Consumer Financial Protection Agency, which would take protection of consumer interests from the Fed, and said he was concerned about the central bank's freedom to lend wherever it wants under its "Section 13 (3)" powers.
The Fed used the powers to lend to AIG, the now quasi-nationalised insurance group, which faced collapse last year at the height of the financial crisis. That is one of several areas of concern to a number of politicians, such as Mr. Paul, who accuse the Fed of being unaccountable and wielding too much authority.
"Fed sycophants argue that an audit would destroy the financial markets' faith in the Fed," said Mr. Paul in a speech last month. "They say this in the midst of the greatest financial crisis in history brought on by none other than the Federal Reserve."
More moderate politicians than Mr. Paul, such as Mark Warner, the Democratic senator and member of the Banking Committee, have come out strongly against granting new powers to the Fed.
If Mr. Frank succeeds in passing legislation that satisfies both the ardent Fed critics and the central bank, he would remove one headache for Mr. Bernanke, who was renominated as chairman of the Fed by Barack Obama, the president, this week.
Mr. Bernanke faces his own, potentially gruelling, confirmation process while steering the economy out of recession and attempting to ensure that the Fed is home to new powers to regulate systemic risk in the economy and does not lose its consumer protection powers to a new agency.
His public efforts to retain consumer protection power are seen by some observers of the regulation debate as a negotiating ploy to ensure that the Fed does not have to divest too much power in other areas.
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