By James Kwak
Bernie Sanders’s “audit the Fed” amendment, which expands the ability of the Government Accountability Office to review Federal Reserve operations, seems to be gaining some momentum. Opponents, including the Obama administration and Fed chair Ben Bernanke, are mounting a defensive effort. There are two main arguments that I have heard.
The first is that publicizing which banks take advantage of Fed lending facilities will stigmatize those banks and could increase panic in the midst of a financial crisis. I’m not particularly convinced by this argument, since most supporters of the amendment are fine with releasing such information with a delay. Section 1152(a)(2) of the amendment eliminates the provision in 31 U.S.C. 714(b) that shields from audit monetary policy decision-making and financial transactions by Federal Reserve banks, but replaces it with this:
“Audits of the Federal Reserve Board and Federal reserve banks shall not include unreleased transcripts or minutes of meetings of the Board of Governors or of the Federal Open Market Committee. To the extent that an audit deals with individual market actions, records related to such actions shall only be released by the Comptroller General after 180 days have elapsed following the effective date of such actions.”
Transparency is supposed to be good for markets, because it gives parties in the market the information they need in order to make rational decisions. I understand the concern that immediate disclosure could make banks avoid using Fed lending facilities in a crisis, which could be bad. But I don’t see why the 180-day delay doesn’t solve this problem. Let’s say (for argument’s sake) that Goldman Sachs borrowed money from a Fed liquidity program in May 2008. If they can’t bear the market receiving this news in November 2008, doesn’t that imply that they really are in big trouble, and the market should know about it? In other words, Goldman and the Fed have six months to solve whatever problem Goldman had. If they can’t solve it by then, then Goldman is no longer worth protecting.
The second argument is that increased GAO oversight will unduly “politicize” or “interfere with” monetary policy. On its face, this objection doesn’t seem to apply, since the amendment would explicitly not bring to light transcripts or minutes of meetings that the Fed had not itself already released.
More fundamentally, though, this objection rests on a disturbing view of how government should operate. Equating information with politicization or interference is a misleading way to justify undemocratic processes. In general, government agencies are supposed to be overseen by Congress (of which the GAO is an arm). As a basic principle, it’s good that the people’s elected representatives have visibility into what the other arms of the government are doing, so that they can make better decisions about, for example, whether heads of regulatory agencies should be reconfirmed, or whether the statutes governing those agencies should be modified. We even have Congressional oversight over deeply secretive operations, such as our intelligence operations. If “politics” means accountability to officials who are actually accountable to the people, then that’s a good thing.
There is a lot of skepticism about Congress these days, and that skepticism is justified. But the alternative — allowing government agencies to operate in secret because we think our Congressional representatives are bozos — is worse.
But the Fed is different, people say. Monetary policy is so technical, and so hard to explain to the public, and so dependent on the credibility of the central bank, that any exposure to politics would be dangerous.
The idea that monetary policy is too technical for Congress to understand, and therefore should be done in secret, I don’t buy. So is, say, climate policy. That’s a complex scientific topic, of crucial importance to the future of our nation (and the human race), that is clearly beyond the ability of Congress to understand and discuss responsibly. But we don’t exempt the EPA from Congressional oversight.
The idea that monetary policy, to work at all, must be sealed off from political interference has a little more merit to it. The idea (to simplify) is that elected politicians always want to lower interest rates in order to boost growth and jobs; in order to maintain inflation-fighting credibility, central banks have to be completely apolitical, and the markets have to believe that they are apolitical. But from there to the idea that there must be a blanket of secrecy over all decision-making is much too large a leap.
Ryan Grim’s article discussing Federal Reserve transcripts from 2004 is especially instructive in this context. The article focuses on a meeting of the Open Market Committee at which there was debate about whether there was an unsustainable housing bubble. The minutes of that meeting, released the same year, whitewashed the debate. More revealingly, the recently-released transcript includes this gem from Alan Greenspan:
“We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand.”
That is the money quote of this whole debate about the Fed, and I’m sorry I buried it 750 words into this post. (I’m not a news reporter, as you no doubt know.) The Fed and its defenders think that monetary policy should be entirely up to them — which it is — and that no one else should even participate in the debate. They are so concerned about this prerogative that they react violently even to suggestions that Fed policy-making should be reviewed after the fact.
This goes hand-in-hand with the idea that the Fed chair is a de facto dictator and that even questioning him is economic treason. We saw this during the Bernanke reconfirmation debate, when supposed experts and Wall Street insiders claimed that, were Bernanke to be voted down, the markets would collapse. I think this claim is almost certainly false, but if it were true that would be even worse: how can it be a good thing that our economy is held hostage to the health of a fifty-six-year-old man? (And Greenspan was seventy-nine when he stepped down.)
Look, we all know there are debates about monetary policy. Intelligent economists have them all the time in public, and Federal Reserve bank presidents have them as well through their public appearances (though in somewhat measured tones). We all know what the arguments on the various sides of those debates are. What we gain by trying to hide them and pretending they don’t exist — except for increasing the dangerous mythology of the omniscient Fed chair — is beyond me.
Monetary policy is important. It is also somewhat technical. It should not be decided by vote of Congress every six weeks. That’s why we entrust it to a committee of twelve people, seven of whom are presidential appointees confirmed by the Senate and five of whom are bank presidents chosen by boards of directors themselves chosen (in a majority) by private banks. Their actions (raising or lowering key rates) are announced the same day that they meet, and commentators jump all over them immediately. The idea that Ben Bernanke would do something he thought was bad for the economy because he was afraid of what a GAO report might say about his decision-making process (remember, the decision is public immediately) is both preposterous and, frankly, insulting to Ben Bernanke.
I don’t actually think auditing the Fed is the most important step we need to take to fix our financial system. And I am open to considering alternatives to the Sanders amendment, if any serious ones were to be put forward. But hiding behind the idea that the Fed is so magical that it has to be hidden from the people it serves is about as undemocratic as it gets.
PS: In Chapter 6 of their forthcoming Crisis Economics (I got a free advance copy from Roubini Global Economics), Nouriel Roubini and Stephen Mihm dicsuss how the Fed’s role changed during the recent crisis — from a traditional “lender of last resort” model to an “investor of last resort” model in which the Fed bought up all kinds of non-traditional assets (e.g., long-term Treasuries, agency bonds) in an attempt to stop the economic downturn. Roubini and Mihm are generally positive about the short-term impact of these policies. But, they argue, by taking the Fed far afield from its traditional scope of action, they raise the issue of democratic accountability:
“The Fed has instead stepped into the financial system and effective subsidized its operations, potentially incurring losses that could ultimately fall on the shoulders of taxpayers. Put differently, it’s engaging in monetary policies that bleed imperceptibly into the traditional domain of fiscal policy — namely, government’s power to tax and spend. Those are prerogatives of the legislative branch, but in this crisis Bernanke’s policies have blurred that line.”
In another passage, they refer to this as “an end run around the legislative process.” This, it seems to me, strengthens the argument that increased oversight of the Fed is warranted.
PPS: Brad DeLong has an argument against the Sanders amendment. But his argument seems to be that the Sanders amendment does not solve the real problems with the Fed:
“I do not think that the Federal Reserve is working reasonably well. I do not think that the dominant views of monetary policy in the FOMC right now are informed by American values and a reality-based assessment of the state of the economy. That a good many of the people speaking and voting in the FOMC are the wrong people to do so did not matter (much) when the Federal Reserve was dominated by the incredibly charismatic (yes, I mean that) philosopher-central banker-princes of William McChesney Martin, Arthur Burns, Paul Volcker, and Alan Greenspan, but it matters now.”
I’m not sure DeLong makes a strong case in his post that the Sanders amendment is actually bad — just that the Fed’s problems go deeper than those that will be solved by greater oversight.