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What Happened to Auditing the Fed?

April 21, 2010 - by Donny Shaw

One of the great political success stories of the past couple years has been the audit the Fed movement. Starting with an unlikely partnership between the far-right Rep. Ron Paul [R, TX-14] and far-left lawmakers Rep. Alan Grayson [D, FL-8] and Sen. Bernie Sanders [I, VT], the push to open up the Federal Reserve to a complete government audit for the first time ever (H.R.1207) has attracted more than 300 co-sponsors in the House and was included in the House’s financial reform bill that was approved last December (see the audit the Fed language in the context of the bill here).

But now that financial reform has moved into the Senate, the audit the Fed proposal has disappeared from the bill and there is virtually no talk of trying to put it back in. Instead, the Senate financial reform bill as written by Banking Committee Chairman Chris Dodd [D, CT] includes a section that looks deceptively like a Fed audit, but would actually do nothing to open up the Fed or remove the special audit restrictions that have allowed the Fed to operate in secrecy for decades.

Here’s the provision as it currently exists in the Senate bill:


Section 2B of the Federal Reserve Act (12 U.S.C. 225b) is amended by adding at the end the following:

‘(c ) Public Access to Information- The Board shall place on its home Internet website, a link entitled ‘Audit’, which shall link to a webpage that shall serve as a repository of information made available to the public for a reasonable period of time, not less than 6 months following the date of release of the relevant information, including—

‘(1) the reports prepared by the Comptroller General under section 714 of title 31, United States Code;

‘(2) the annual financial statements prepared by an independent auditor for the Board in accordance with section 11B;

‘(3) the reports to the Committee on Banking, Housing, and Urban Affairs of the Senate required under the third undesignated paragraph of section 13 (relating to emergency lending authority); and

‘(4) such other information as the Board reasonably believes is necessary or helpful to the public in understanding the accounting, financial reporting, and internal controls of the Board and the Federal reserve banks.’.

The provision tries to sell itself as an “audit,” but, in reality, it is basically meaningless. Under current law, (31 USC 714 – Sec. 714) government auditors are specifically restricted from looking at four important arease of Federal Reserve activity: (a) transactions with foreign central banks or governments, (b) monetary policy matters, including discount window operations and open market operations, (c ) transactions made by the Federal Open Market Committee, and (d) any discussion or communications regarding these areas of operation. These are some of the most important areas of the Fed’s work. The “discount wondow,” for example, is where the big banks have been flocking since the 2008 crisis to borrow hundereds of billions of dollars from the governemnt. Without public disclosure, we’ll never know how much of that money is being payed back.

The real “audit the Fed” bills in Congress (H.R.1207 and S.604) would remove these restrictions from the law and allow for complete government audits of the Fed’s monetary policy activities. The Senate financial reform bill would keep these restrictions in place and simply create a convenient web portal for finding Fed audits dealing with other elements of their operations. Currently, the Fed is audited routinely by the Government Accountability Office, just not in regards to any of the ares that would reveal anything about their monetary policy. The audit reports currently look at things like information security and electronic funds transfers.

It remains to be seen whether or not someone will propose a real audit the Fed amendment to the financial reform bill in the Senate. Sen. Bernie Sanders [I, VT] and Sen. Jim DeMint [R, SC] have been the leading advoactes for Fed transparency in the Senate, so if an amendment is submitted, it will likely be from one of them. The Fed would get several new powers under the Senate bill — including housing the Consumer Financial Protection Agency and supervising financial institutions that are considered systemically dangerous — so, for supporters, auditing the Fed woud be more critical than ever once the bill becomes law. If the Senate does not act to add real audit the Fed language to their bill, it’s very unlikely that the House langugae would win out in the Senate-House conference committee and get included in the final financial reform bill that is sent to Obama to become law.

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